San Marino Books in Auditors’ Hands

The city’s financial accounts have been turned over to an auditing firm since City Treasurer Ray Wood was fired after San Marino lost about $2 million in a speculative securities deal.

“We’re stunned and upset,” said City Manager John Nowak after learning that Wood had allegedly violated city investment policy by buying government bonds on margin.

Nowak said the discovery late in September coincided with the annual auditing of city books, in which auditors found that Wood had made the unauthorized transactions. Wood was fired Sept. 30.

“Now auditors are doing a full account and our attorneys are doing a full investigation, and we are waiting for the outcomes,” Nowak said.

Other Cities Also Lost

Wood made the same investments for the cities of Lawndale and Palmdale, losing a total of about $8 million for the three cities when the bond market fell.

Spokesmen for the cities said their attorneys are studying the transactions’ legality and may ask the district attorney’s office for an investigation.

Wood also was fired by Lawndale and Palmdale.

“I made an error in judgment,” said Wood, 62, who has been financial officer for many Southern California cities for 27 years. “I didn’t realize what was happening until I was trapped.”

In an interview, Wood declined to identify the broker he used for the transactions but said he received no compensation for making the investments.

Officials in the three cities said they have no knowledge that Wood personally profited from the transactions.

Nowak said the $2-million loss wiped out San Marino’s reserve fund, which is traditionally invested to provide interest income and to be available for emergencies. He said the loss will not affect the operation of the city.

San Marino has an annual budget of about $6 million, most of it devoted to employee salaries. The immediate result of the $2-million loss, Nowak said, will be that San Marino will lose some investment income.

Considered an Expert

Wood, considered an expert in city finance, was appointed San Marino city treasurer in July. Since 1984 he had served in a similar capacity as a financial consultant in San Marino and was authorized to make the city’s investments.

Nowak said that in a margin account, an investor puts down a fraction of the price of a security, hoping that the market will rise. However, if the market falls more than the amount invested, the entire investment is wiped out unless the investor puts in additional funds.

He said small cities usually invest in low-risk certificates of deposit or in the state treasurer’s Local Agency Investment Pool. Most cities, including San Marino, have policies that require conservative investments, he said.

“We believe the investments Wood made were in violation of city policy,” Nowak said.

Palmdale City Atty. Graham Ritchie said state law explicitly states the types of transactions that a city can make with its surplus funds, and margin accounts are not authorized.

Nowak said that he has had no reason to question Wood’s performance and that most financial transactions are done routinely by the city treasurer.

However, he said, he was taken by surprise in September when San Marino received a margin call--a notice that additional funds are required for the account--when Wood was away. At that time, books were being audited in San Marino, Palmdale and Lawndale by the same firm, and other margin purchases were discovered.

More Margin Calls

Nowak said the 1986 speculative investment was not discovered in last year’s city audit. However, it was found this year that at least two margin calls had been made since the last audit.

He said auditors told him they presume that the margin calls were made sometime since last spring when the bond market began to fall.

“There were a total of four different transactions and the losses, including about $150,000 in annual investment income, add up to about $2 million,” Nowak said. “Although we had about $7 million invested at the time, we were able to recover the vast bulk of the money.”