California Elections : Investment Loss Gives Challengers Ammunition in Water Board Race

Times Staff Writer

Challengers seeking to unseat senior members of the Three Valleys Municipal Water District's board of directors say the district's loss of $1.5 million last year in investments with E. F. Hutton & Co. reflects poor judgment by board members.

The two established incumbents respond that the loss, which led the district to join several other public agencies in a lawsuit against the firm, was the result of deceit by an investment broker. They say the investment loss is being used as a political ploy by allies of a dissident board member who wants to gain control of the board.

Regardless of which side they're on, most candidates are doing a lot of talking about the ill-fated investments in the final days before Tuesday's election.

Three of the board's 5 seats are at stake, with incumbents Sandy Baldonado and Doug Miller running for reelection. The Rev. Richard Engdahl, appointed to the board in August after the death of Carlton Peterson, is also seeking to keep his seat.

Baldonado, who represents Claremont and half of Pomona, is challenged by two well-known Pomonans in her bid for a third term. Former Mayor G. Stanton Selby and former Planning Commissioner R.V. Armstrong said they were prompted to challenge Baldonado after reading newspaper accounts of the investment loss.

Miller, a former Glendora city councilman who represents Glendora, San Dimas and part of Covina, faces a similar challenge from Bruce Milne. A San Dimas consultant on waste-water projects, Milne said he entered the race because he did not believe Miller should run unopposed after the district's loss of public funds.

Neither of the two challengers to Engdahl, who was not on the board when it voted to make the investments in October, 1986, has made the loss an issue. Philip Crocker and Paul Stiglich, both of whom work for water providers, have chosen to make their expertise the focus of their campaigns for Engdahl's seat, which represents Diamond Bar, Rowland Heights and parts of Walnut and the City of Industry.

Not up for reelection, but a key figure in the race nonetheless, is board member William Koch, who voted against the investment with E. F. Hutton and has opposed the board majority on numerous other issues.

Entire Account Lost

It was Koch who disclosed in September, 1987, that the district had lost at least $900,000 of its $1.5-million investment with Hutton. The district later revealed that its entire account with Hutton had been lost through margin trading on the bond market.

Three Valleys General Manager Richard Hansen has said he was unaware that the district's money had been invested on margin--the purchase of commodities with borrowed money, which substantially increases both potential returns and the risk of losing everything.

In January, the water district joined a lawsuit by public agencies including the cities of Lawndale, Palmdale and San Marino, alleging that Hutton broker William Parodi had invested public money on margin without the knowledge or authorization of the agencies.

Officials with Hutton, which has since been absorbed into the firm of Shearson Lehman Hutton, insisted that the agencies were kept informed of the nature and status of their investments. The FBI and the U.S. Securities and Exchange Commission have been investigating the matter since last year, but have yet to release their findings.

Board Censured Koch

Koch also accused board members and Hansen of attempting to cover up the loss. The board subsequently censured Koch for disclosing to the press information about the loss that had been discussed only in closed session.

Earlier this year, the district filed suit against Koch, accusing him of collecting $4,700 in excess fees while he was serving as the district's representative to the Metropolitan Water District of Southern California. The district attorney's office is investigating Koch for possible criminal conduct.

In a letter sent to local newspapers last week, Koch blamed Baldonado and Miller for the loss of the district's reserves. Although he did not endorse any candidates in the letter, Koch urged voters to "discipline (the incumbents) at the ballot box."

In interviews last week, Baldonado and Miller said Koch was exploiting the loss to promote the candidacies of Selby and Milne. The two said Koch had talked Selby and Milne into running for the board in hopes of achieving a majority that would reinstate him as representative to the Metropolitan Water District and dismiss the lawsuit against him.

"He wants his cronies and his puppets to get on the board so he can get back on the Metropolitan board and continue bleeding the district," said Baldonado, 53, a Claremont attorney.

Koch denied encouraging the two challengers to enter the race, adding that he did not even speak to them about their candidacies until they had filed papers to run. He rejected the assertion that he was seeking a board majority he could manipulate.

"Stan Selby is his own man," Koch said. "I didn't even know Bruce (Milne) before he decided to run. . . . I have talked to them since they filed." Koch added that he is supporting both men in the race.

However, Milne said he has known Koch for several years and that Koch was the first person to suggest he should run. "But my reason for running was not to give Bill Koch a majority," he added. "My reason for running was that I thought I could do a heck of a lot better job than Doug Miller."

Milne, 36, vice president of a waste-management consulting firm, said he was displeased with the decision to place public money in a "high-risk" investment. He rejected the explanation given by board members and Hansen that they were unable to discern from the investment firm's reports that money had been invested on margin and that the value of the district's account was rapidly declining.

"You're either pleading negligence or ignorance, and neither one is a worthy virtue if you're sitting on a board," Milne said. "Board members should at least be able to read a financial statement. . . . Then, when I saw this group of four (board members) trying to gang up and censure Bill Koch, I thought, 'This is ridiculous.' "

No 'Personal Vendetta'

Selby 68, said that although he and Koch are friends, the board member did not persuade him to run. "I'm not running for this board because of Bill Koch, I'm running for Stan Selby," he said. "I'm not running to carry on some personal vendetta. I really resent people trying to imply that I don't have a mind of my own."

Selby, who was defeated last year in his bid for a third term as Pomona's mayor, said he is running for the water district board "to restore some credibility . . . and renew the public's faith."

"I can't go back and change what's already been done, but I can ensure it won't happen again," Selby said, adding that he is bothered that matters such as the investment loss were discussed largely in closed meetings. "This board spends too much time in executive session and not enough in the open letting the public know what's going on."

Armstrong, who is vying with Selby for Baldonado's seat, said his candidacy was also prompted by the investment loss.

"I just felt it was beyond reason for anyone to get involved with that kind of investment with someone else's money," said Armstrong, 64, who served last year on the Los Angeles County Grand Jury, which briefly investigated the investment loss. "I would hopefully bring some fiscal responsibility to the board."

Investment 'Non-Issue'

Miller, 36, who was elected to the board in 1980, dismissed the criticism of the investment loss as "a non-issue" in his reelection campaign, adding: "The real issue is 'Did Doug do his job?'

"In the E. F. Hutton matter, we acted prudently and we became a victim, as did six or seven other public agencies," Miller said. "We invested in five different firms, and four of the five followed the board's investment policies. (Hutton) violated our policies (prohibiting high-risk investments)."

Added Baldonado: "I think we made the decision (to invest with Hutton) in good faith. We made it with an investment broker that was certainly a prestigious one. . . . I don't think anybody could have done anything differently. It was just our bad fortune to run into someone who was unscrupulous."

Not every candidate sees the investment loss as a prime topic of campaign debate.

"That's history as far as I'm concerned," said Crocker, 56, general manager of the San Gabriel County Water District. "I think it's a dead issue."

Engdahl, 51, is more critical of the investment venture but said the district should put the controversy behind it and concentrate on supplying water to the eastern San Gabriel Valley.

"My experience is that you don't invest public monies at a high risk," said Engdahl, pastor of the Northminster Presbyterian Church in Diamond Bar. "But the error has been admitted, and as a minister I would say: 'Confess your sins and get on with the work you have to do.' "

In contrast to the allegations of fiscal mismanagement and a conspiracy to gain control of the board, the issues surrounding the race for Engdahl's seat have centered on technical qualifications.

Both Crocker and Stiglich, who is water quality supervisor for the city of Anaheim, said their lengthy professional experience in dealing with water issues makes them best suited to oversee the district's operation.

"I've been in the water business for over 30 years," said Crocker, former superintendent of the Diamond Bar Water Co. "It is essential for valley residents to be represented by a professional water manager who is familiar with the many complex issues of water management and fiscal requirements."

Stiglich, 36, a former engineer with the Metropolitan Water District, said he has more "hands-on" experience in the field than Crocker.

"His experience has been more in the bureaucracy of water organizations," Stiglich said. "I've got good experience in water quality control and water treatment, and these are the issues that will be facing the (Three Valleys) district in the future."

Denies Expertise Needed

Engdahl, a former member of the Walnut Valley Water District's board of directors, said a professional background in water management should not be a prerequisite for serving on the Three Valleys board.

"The technical aspects of water are important, but that's what you pay people to do," Engdahl said. "The technical ability of my two opponents is not necessarily going to help them to keep the district from losing a million and a half dollars to E. F. Hutton."

Serving as water broker, Three Valleys buys water from the Metropolitan Water District and sells it to retail water companies and city water departments in the eastern San Gabriel Valley.

Tuesday's election will be the district's last for a 5-member board. In June, a special election will be held to fill two newly created seats that will provide greater representation to communities in the southern part of the district, such as Rowland Heights, Walnut, Diamond Bar and Pomona.

The board's expansion to seven members resulted from a threat by water providers in these communities, which provide 60% of the district's revenues, to secede from the district unless they received greater representation. The expansion was opposed by board members representing the district's northern communities, including Baldonado, who termed it "a power move by the southern agencies."

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