District Was Told of Investment Loss, Reports Show

The Three Valleys Municipal Water District was informed that it was losing money on its investments with E. F. Hutton and Co. more than eight months before the district’s board of directors says it was told of any losses, a review of monthly reports prepared by the investment firm shows.

The monthly reports, provided to The Times by Three Valleys board member William Koch, indicate that the net worth of the district’s portfolio had fallen more than $200,000 by December, 1986, a month after the district invested $1.5 million with Hutton.

Three Valleys General Manager Richard W. Hansen has said he was unaware that the district was losing money on its investments until Hutton representatives informed him last April of a $200,000 “paper loss.” Hansen has said he did not realize the seriousness of the losses until September, when he told the board of directors that the district had lost $900,000.

In an interview this week, Hansen said he did not see the monthly reports, which were reviewed by a member of the district’s staff. The staff member, Chris Francisco, compiled reports from Hutton and four other investment firms and provided summaries of all the district’s investments to Hansen and the board members. The summaries never indicated the declining value of the Hutton account, Hansen said. Francisco has refused to comment.

Although the Hutton report for December--received by the district on Jan. 8--showed that the net worth of Three Valleys’ portfolio had fallen from $1.5 million to $1.29 million, Hansen said he was not informed.

“I was not aware of it, and I think it probably wasn’t until April that any of this was brought to my attention,” Hansen said.

Hansen said he does not blame Francisco or any other staff members. None of the staff members are financial experts, Hansen said, and they depended on Hutton’s investment expertise.

Steve Nelson, a spokesman for Hutton in New York, would say only that the firm received proper authorization for all investments made.

According to the monthly reports from Hutton, the net worth of the district’s portfolio had fallen to $637,270 by the end of April and was never more than $744,889 at any time thereafter.

The money lost by the district was invested in government bonds purchased “on margin,” a practice whereby investors borrow money to augment their deposits. Trading on margin can be lucrative when the bonds increase in value, but is costly to investors when the securities’ value decreases.

Three Valleys intends to file suit against Hutton by the end of next week, claiming that the investment firm engaged in margin trading without authorization and did not accurately inform the district of the portfolio’s status, Hansen said.

However, the monthly report from Hutton last December said that the district’s funds had been invested on margin.

By September, the bonds’ value had dropped to the point that the district began receiving “margin calls” from Hutton--requests to sell off securities or invest more money to cover the loans. On Sept. 22, Hutton liquidated the Three Valleys account to satisfy the margin calls and billed the district for an additional $58,000 not covered by the funds remaining in the account.

Hansen has said he did not know the district’s money had been invested on margin until an April meeting with Hutton representatives. He said he did not understand until much later that the entire portfolio was at risk.

“They never explained to us that we had a margin account, or what a margin account was or what it could do to our portfolio,” Hansen said.

When the investments were first made in November, 1986, Three Valleys entered into a standard client agreement with Hutton, which permitted the firm to trade on margin, Hansen said. But Hansen said a copy of the water district’s investment policy, which prohibits “speculative” investments, was attached to the agreement.

“Our (investment policy) amendment would supersede anything that was stamped out in a standard agreement form,” Hansen said.

After being informed that Hutton was trading on margin, Three Valleys sent the firm a letter reiterating its investment policy and ordering that margin trading cease immediately, Hansen said.

Hansen argued that even if he had approved margin trading, Hutton had a legal responsibility not to use public funds for such speculative investments.

Three Valleys Municipal Water District is a public agency that serves as a water broker, importing water from Northern California and the Colorado River to supplement water supplies for customers in Pomona, Walnut, Rowland Heights, Diamond Bar, Glendora, San Dimas, La Verne, Claremont and parts of Covina, West Covina and Industry.

The district receives money through water fees, property taxes and interest on its investment holdings. The district, governed by a board of five elected directors, currently has reserves of $11.6 million, Hansen said.

Hansen said that when he was told in the April meeting with Hutton representatives that the portfolio’s market value had decreased, he believed that price fluctuations would not seriously affect long-term investments such as 30-year bonds.

“It wasn’t viewed as significant basically because we were planning to hold those bonds until maturity,” Hansen said. But because the bonds were purchased on margin, the district would have had to invest more money in September to continue holding the securities.

Hansen said staff members noticed in the monthly reports that Hutton appeared to be trading on margin but that Hutton account representatives denied it. The account representatives told district staff members that apparent margin purchases were “group buys” made in conjunction with other investors, Hansen said.

“Our staff was asking them questions, and we had no reason to question their answers,” Hansen said. “We were dealing with a very reputable firm.”

This response did not satisfy Koch, the only member of the board of directors to vote against the investments.

“Mr. Hansen keeps claiming that at no time did he know we had any losses,” Koch said. “He’d have to be blind not to see that . . . beginning in December, that we’d lost well over $200,000.

“The responsibility to withdraw our portfolio at that time and not allow another $1.3 million to go down the speculative tube--that responsibility lies with the board of directors. But we were not informed. From December on, any money we lost, the person fully responsible is Mr. Hansen.”

Pomona City Councilman Mark A. T. Nymeyer has also raised questions about Hansen’s handling of the district’s investments and has requested an investigation of the matter by the county grand jury.

In a letter to grand jury foreman Manuel Gallegos, Nymeyer wrote that the monthly reports from Hutton “clearly indicate losses starting in December of 1986 of $206,759 and continued until September of 1987 when Mr. Hansen ‘suddenly discovered’ that the district had lost over $900,000.”

Nymeyer said the district lost the money “because of unusual and abnormal investing procedures and practices.” He said he was concerned about the loss because Pomona residents account for 29% of the district’s revenues.

Nymeyer also chastised the board of directors for voting to censure Koch after he disclosed the loss to the media and criticized district officials for denying Koch access to complete records of the investments.

Gallegos said he received Nymeyer’s request last week and referred it to the grand jury’s Governmental Operations Committee. The committee will determine whether the matter warrants investigation and will notify Nymeyer of its decision by the end of next week, Gallegos said.

Nymeyer refused to comment on his request to the grand jury and said he was bothered that it had been made public, since publicity could interfere with the investigation.

Hansen responded that a grand jury inquiry is unnecessary.

“We’re doing our own investigation, and we’re pursuing legal action to recover everything--I don’t know what else can be done,” Hansen said. “I know everything the district did was done properly and in an expedient manner as soon as we knew what was going on.”

The board of directors has ordered Hansen to cooperate with all outside investigators, said board member Sandra Baldonado, who also said a grand jury investigation is unwarranted.

“I don’t think the district did anything; I think E. F. Hutton has some questions to answer,” Baldonado said. Other board members agreed that the district was not responsible for the loss.

Baldonado added that she believes Nymeyer made the request to the grand jury “to get some press.”

“Nymeyer has got his own agenda,” Baldonado said. “He and Mr. Koch are two peas in a pod, so I don’t put any credence in anything (Nymeyer) does. . . . It’s all political grandstanding.”

Board member Douglas Miller was also angered by Nymeyer’s request.

“Before Mr. Nymeyer goes shooting his mouth off, he should get the facts,” Miller said. “I don’t know of any attempt by Mr. Nymeyer to contact the district and get the facts.”

The district’s investments with Hutton were handled by account representative William E. Parodi until March, when Parodi was “permitted to resign” from the firm. Parodi also made investments for the cities of San Marino, Lawndale, Palmdale, Bellflower and Rancho Palos Verdes, which together lost more than $9.2 million through margin trading.

Contacted at his home in Woodland Hills, Parodi referred most questions to his attorney. However, he said the district was fully informed of the type of investments it was making and the risks involved. Nelson, Hutton’s spokesman in New York, would not confirm this, but said district officials were apprised of how the investments were performing.

“It’s impossible to say exactly what Mr. Parodi told them . . . (but) definitely by March, after Mr. Parodi was permitted to resign from the firm, Hutton had meetings with Three Valleys officials and gave them full information as to the status of their account and what their options were,” Nelson said.

Baldonado said she first learned of the severity of Three Valleys’ investment problems in mid-September, when Hansen told the district’s finance committee of what appeared to be a $900,000 loss.

“I certainly would have been a lot happier had I known there were problems somewhat earlier,” Baldonado said.

Upon hearing of the loss, Baldonado requested that the full board of directors be informed. She now regrets having done so because she said the attention generated by Koch’s revelation prevented the district from reaching a confidential settlement with the investment firm.

Rancho Palos Verdes made such an agreement with E. F. Hutton after losing about $1 million through investments made with Parodi, according to sources in city government. The firm gave the city back the $1 million plus interest, and both parties agreed not to comment publicly on the matter.

“They concluded a sweetheart deal,” Baldonado said. “I think we could have done the same thing if Mr. Koch had kept his damn mouth shut. But once the cat was out of the bag, E. F. Hutton had no reason to cooperate.”

At a board meeting Tuesday, Koch again asked that all records of the district’s dealings with Hutton be made public. And again he was told that the information could not be released because it is the subject of pending litigation.

“It’s off limits at the moment,” board President Muriel O’Brien told Koch. “It will do us a great deal of harm if we open it up.”

Koch has said that “the public’s right to know” how taxpayers’ funds are invested justified his disclosure of the loss and the release of district documents to the press. He has accused his fellow board members and Hansen of engaging in a cover-up of the loss. Hansen denies this.

“No one here at the district is stupid enough to think you can sweep this under the rug and make it go away,” Hansen said.

O’Brien said Koch’s disclosures may hurt the district’s chances of recovering some or all of the $1.5 million.

“What this particular director doesn’t seem to understand is that he’s laying a case for E. F. Hutton and damaging the constituents he says he is so eager to protect,” O’Brien said.

In the wake of the investment loss, Koch has demanded that the board of directors take disciplinary action against Hansen, preferably firing him as general manager.

“How long can we afford to keep him as general manager of Three Valleys Municipal Water District?” Koch said. “He may serve the district for many years without losing any more money, but the pattern that’s been established indicates that we might be looking at more losses in the future.”

The other four board members all expressed support for Hansen. At Tuesday’s meeting, board member Carlton Peterson dared Koch to call for Hansen’s removal.

“Come on, say it: You want to fire him,” Peterson told Koch. “Let’s have a vote of confidence.”

Such a vote was not taken because the matter was not on the agenda. However, Peterson said sentiment on the board is running 4 to 1 in favor of retaining Hansen.

If his colleagues do not vote to discipline Hansen, Koch said he would support any recall efforts against the other four board members.

Baldonado said that after the district concludes its legal efforts to recover losses from Hutton, the board will take steps to ensure that a similar situation does not occur again. Those steps might include disciplinary action, Baldonado said, but she refused to discuss Hansen’s future or any specific measures the directors might pursue.

In response to Koch’s threat of a recall, Baldonado expressed neither concern nor surprise.

“Nothing he does surprises me--he’s a loose cannon,” Baldonado said. “That’s fine. Let him do a recall. I don’t think that those kind of statements do any good.”

WHAT THE DIRECTORS SAID