Maywood lost $94,000 after purchasing U.S. Treasury notes with borrowed money, city officials say, making it the second Southeast area city to admit getting burned in speculative securities deals.
Maywood's loss seems small compared to those of Bellflower and other Los Angeles area cities that lost millions when they purchased securities on margin, or with borrowed money. But last week the Maywood City Council voted to join the cities of Lawndale, Palmdale and the Three Valleys Municipal Water District in San Gabriel in a cooperative legal effort against the brokerage firms of E.F. Hutton and First Investment Securities Inc. to recover the lost money.
"The good news is that our loss is minuscule when you look at the rest," said Edward Dilkes, legal counsel for the Maywood Redevelopment Agency. "But we will explore every avenue of reimbursement."
Vote to Hire Law Firm
In a 4-0 vote the agency agreed to hire Ruttan & Tucker, an Orange County legal firm that represents Lawndale and the water district.
"There is enough commonality of interest here that it makes sense for all the cities to pool our resources," Dilkes said.
Maywood Treasurer Michael Williams says that he did not know investments were being bought on margin and was misled by Ed Ortiz, a broker with First Investment Securities Inc.
Ortiz, who was contacted at First Investment Securities' Woodland Hills office, declined comment.
In a margin account, an investor puts down a fraction of the price of a security, hoping the market will rise. But these accounts can be risky because while margin buying leverages investors' profits when prices are rising, it can wipe out the entire investment if the price of the security falls lower than the amount invested. If this happens, margin calls are made and additional money must be put in to keep the account afloat.
Williams said that he was contacted by Ortiz last spring about an investment deal where monies from "several cities would be pooled to buy and sell Treasury bills."
"He led me to believe that we were in a pool with other cities and that the profit would be shared," Williams said. "We weren't buying these on margin, I thought."
In May, Williams said he gave Ortiz $100,000 in what Williams thought was part of Maywood Redevelopment Agency's share in the pool. Last month, Williams said he discovered, through monthly statements from First Investment Securities, that the money was used to purchase $1 million in zero coupon Treasury Notes on margin for the agency. On Nov. 18, the city sold the bonds on the recommendation of the city auditor and received $6,500.
Williams said Ortiz denied buying the notes on margin in late November.
"The total loss wasn't discovered until November," Williams said. "Before that I knew we lost some money on trades, but Ortiz felt we could probably make the money back if we held on."
Williams said the decision to close the account was not prompted by the stock market crash or by the publicity surrounding losses in other cities. "We sold when we realized that there wasn't going to be any profit." Williams said.
The agency's 1987-88 operating budget is $6.7 million and its investment portfolio stood at $513,000 as of Nov. 30, Williams said.
Williams said Ortiz told him that he worked under William E. Parodi. Parodi made investments for the cities of Bellflower, Lawndale, Palmdale, San Marino, Rancho Palos Verdes and the water district when he worked at the brokerage firm of E.F. Hutton. He resigned from Hutton in March. Those agencies say they lost a total of $10.8 million.
"It appears that the same people who used to work for E.F. Hutton moved to First Investment and simply operated out that firm rather than E.F. Hutton," Dilkes said.
When reached at his Woodland Hills home, Parodi declined comment and refered all questions to his attorney, Howard Boltz, who also declined to comment.
Billy Smith, a spokesman with First Investment Securities' Little Rock headquarters, did not return repeated telephone calls.
Although the city treasurer's office is an elected position, Williams, 30, was appointed by the council in July, 1986, to fill an unexpired term. Both Williams and City Administrator Leonard R. Locher are authorized to make investments for the city.
It is the usual procedure for the city treasurer to make investment decisions without consulting the council, Locher said.
City council members said they were surprised when they learned of the loss last month.
"I was quite shocked when I heard because we are pretty frugal with our money," said Mayor Pro Tem Rosemarie Busciglio. "But I guess we were pretty lucky. We got out right away."
In Bellflower, where $290,000 was lost, the city attorney, Maurice O'Shea, said last week that E.F. Hutton has agreed to reimburse the city $78,000.
"That puts our loss at about $203,000," O'Shea said. "But we will continue to negotiate to recover the full amount."