Ex-Broker to Camarillo May Be Probe Target

A brokerage firm reportedly under investigation by the FBI and the Securities and Exchange Commission for its role in speculative investment losses suffered by at least nine Southern California cities also played a significant role in the $20 million lost by Camarillo last year, city records show.

Camarillo paid out more than $2 million to First Investment Securities to cover speculative bond investments during a three-month period last spring, the records show.

The full extent of Camarillo’s losses from investments made through First Investment, as well as several other brokerage firms last year, will not be known for several weeks, city officials said. In total, however, Camarillo lost about $20 million from its $24-million investment portfolio last year, officials said.

First Investment, based in Little Rock, Ark., is the target of a lawsuit filed in federal court in January on behalf of six California municipal agencies that lost at least $8.4 million in similar investments last year. In that suit, the cities allege that the investments violated state regulations and the cities’ investment policies.

Officials Interviewed

The losses are the subject of an investigation by the FBI and SEC, said David J. Aleshire, one of the attorneys representing the municipal agencies in the lawsuit. Aleshire, who also serves as the city attorney of Lawndale, one of the cities filing the suit, said last month that federal investigators have begun interviewing city and agency officials in the matter.

Aleshire said he believes that the FBI is investigating possible criminal violations of federal wire-, mail- and bank-fraud statutes.

Officials from the FBI and SEC declined to comment last week when asked whether they were investigating. First Investment officials could not be reached for comment.

Camarillo City Atty. Colin Lennard said he spoke with an SEC official last week about his city’s investment losses, but declined to give any information until an audit of the losses is completed by the accounting firm of Arthur Andersen & Co. The SEC spokeswoman told him that an investigation involving the investments was under way, Lennard said.

“We intend to cooperate as much as we can. . . . However, we don’t want to prematurely share any information which would compromise any potential litigation,” he said.

Lennard said it is possible that the city will file a lawsuit seeking recovery of the investment losses from firms or individuals involved. He said it is not probable that the city will join in the lawsuit against First Investment because Camarillo’s investment losses

Treasurer Fired

Longtime Camarillo City Treasurer Donald F. Tarnow, 46, was fired last month after city officials learned that he failed to notify the City Council about millions of dollars of city funds he lost by engaging in highly speculative bond market investments last year.

Camarillo city officials learned of the losses only after city checks started bouncing in November. Tarnow, an 18-year employee, had been given wide discretion in investing the city’s money until it was needed to pay for city services and public improvements.

In an interview last month, Tarnow denied any wrongdoing in the investments and blamed the losses on last spring’s falling bond market.

Lennard said that, so far, there is no evidence of criminal wrongdoing on the part of Tarnow.

The bulk of Camarillo’s losses came from the buying and selling of government-backed securities on margin, city officials said. The practice involves purchasing securities by paying for only part of their value. Ideally, when the bond market is rising, investors can profit by selling the bonds at higher prices without having to pay the full price.

In a falling market, however, the city was committed to purchasing the bonds at a price that was below the market price. Although Camarillo could have retained the 20- and 30-year bonds to maturity and thereby avoided the losses, the city needed the money to pay for city projects and services, and so the bonds were sold at a loss, officials said.

Profit Possible

Also, Tarnow routinely made commitments on behalf of the city to buy and sell the securities at a price set generally 30 to 60 days in advance of the transaction. Again, under favorable conditions, a substantial profit can be made when the transaction is made without having to spend city money.

But, when the bond market fell last spring, Camarillo lost millions. Despite the losses, Tarnow continued in May and June to seek new brokerage firms engaging in similar bond market investments, cityrecords show.

arillo officials said they are trying to determine whether brokers involved in the investments apprised the city of the investment risk, as required by law.

William W. Wynder, an attorney also representing the cities suing First Investment, said that broker William E. Parodi and his brother, Fred Parodi, are named in the suit. The brothers, who are based in Woodland Hills and have worked for First Investment, made the investments that led to losses for the cities of Lawndale, San Marino and Palmdale, the Three Valleys Municipal Water District in the San Gabriel Valley and redevelopment agencies in Palmdale and Maywood, which have all joined in the suit, Wynder said.

Legal Action Weighed

Other cities that also suffered losses through First Investment include Imperial Beach in San Diego County, Chino and Rancho Palos Verdes, Wynder said. At least some of those cities are considering legal action, he said.

William Parodi’s name and telephone number appear in Camarillo investment records in association with a variety of speculative bond-market investments. He could not be reached for comment.

Wynder said the investments, made through Parodi and First Investment by the cities in the lawsuit, were inappropriate because of their speculative nature. The cities depended on the financial expertise of their broker to make prudent investments.

“These brokers went to a number of public entities and represented that they were experts on investing on behalf of municipalities,” Wynder said. “The bottom line is that the Parodis, without giving full disclosure, caused these entities to invest in inappropriate investments under California law or against their own policies.”