Camarillo's former treasurer may have lost $20 million of the city's $24-million investment portfolio by engaging in unauthorized, highly speculative investments, an auditor for the accounting firm Arthur Andersen & Co. told stunned City Council members Tuesday night.
The firm is conducting a comprehensive audit of Camarillo's investments after an internal city audit turned up $2.5 million in investment losses.
Alan C. Darlington, an accountant for the firm, said: "We have not noted any . . . transactions that would indicate personal gain."
Donald F. Tarnow, 46, was fired Feb. 2 after 18 years of city employment and his boss, Finance Director Larry Weaver, 49, resigned.
Although the firm's audit is ongoing, a preliminary report by Darlington indicates that Tarnow:
Invested $2.8 million of the city's money in two private corporations in arrangements that might not be federally insured. The deals make the city the majority shareholder in two financially troubled firms that will require huge additional infusions of money to stay in business. They are Hospitality Services Inc., a San Marino-based operator of convalescent homes, and Desert Resorts Investors Ltd., which owns a motel and spa in Desert Hot Springs.
Hired his own lawyer to advise him on financial matters, a move that City Atty. Colin Lennard called unauthorized.
Mingled funds of the City of Camarillo, the Camarillo Sanitation District and three employee pension funds.
Authorized a government-securities broker to execute margin trades at the broker's discretion.
Did not accurately characterize investments to the City Council and kept "inadequate and inaccurate" records.
City Council members said they did not understand how Tarnow was able to escape detection for so long.
"We did have policies and controls in place, but apparently they weren't functioning as well as they should have," said Sandi Bush, Camarillo's vice mayor.
Lennard said numerous lawsuits are probable as the accounting firm unravels the complicated financial transactions in which city money was used.
Darlington said most of the losses appear to have occurred before June. The firm is still investigating what happened to a $3.9-million investment made with a brokerage house that now claims a zero balance in the city's account, he said.
Tarnow also engaged in "forward contracting" with federally insured Treasury notes and mortgages, a practice that, although legal, is deemed too risky by most municipalities, Darlington said.
Forward contracting allowed Tarnow to buy government securities at a set price 30 days before the bonds were issued, Darlington said. If they went up, the city made money, which was the case for several years as the bond market soared, he said.
Tarnow said he earned Camarillo 10% to 15% annually in investments.
But when the market sagged in spring of last year, Tarnow's agreements to buy government bonds at a future date for prices higher than market value led to major losses for the city, the auditor said.
Tarnow has said in previous interviews that he notified the City Council of the investment losses, but City Manager Thomas W. Oglesby said Tarnow failed to keep the council informed.
Camarillo's fiscal problems first surfaced in November, when $16,000 in city checks for part of a $5.3-million road and bridge project bounced.
When more checks bounced in December, city officials called for a preliminary audit of city investments. By the year's end, John Reed, a Westlake Village accountant who conducts annual audits for the city, had found the first losses.