O.C. Water District’s Fund Decisions Raise Questions

Mission Viejo National Bank was on the verge of insolvency.

The bank’s parent corporation, in fact, publicly warned consumers that it was about to report a second-quarter loss so big that it wouldn’t be able to meet minimum federal banking requirements. Government examiners had gone to work on the bank’s books.

And then, nine days after the bank’s deathwatch began, it got a sudden injection of cash from a most unlikely savior--the Santa Margarita Water District. On July 25, 1991, records show, the district purchased a $2-million certificate of deposit, potentially exposing the district to a major loss, since accounts are federally insured only up to $100,000.

The district incurred no loss, however, because it redeemed the certificate of deposit when it matured.

That transaction is but one among many at the water district that raise questions about the handling of customer funds and the proceeds from public bond sales managed by Assistant General Manager Michael P. Lord.

Lord and his boss, General Manager Walter W. (Bill) Knitz, were suspended with pay earlier this month, after The Times revealed that they had made excessive claims on their expense accounts and accepted lavish gifts from contractors they acknowledge recommending for non-bid contracts worth tens of millions of dollars.

In its continuing two-month investigation, The Times has also found that:

* The district’s multimillion-dollar general operating fund--where the monthly payments from the district’s 26,500 customers are deposited--followed South County banker Charles D. Maranto as he went from bank to bank to bank over a five-year period. The FBI-Orange County district attorney’s office task force examining the Santa Margarita district is investigating Maranto’s banking activities, authorities told The Times.

* Lord obtained at least a $50,000 loan, a $45,000 line of credit and another $3,000 credit line from those same banks, according to records and interviews with bankers. In an interview, Maranto characterized Lord as a friend but said he never treated the water official differently than any other of the “large deposit customers.”

* The water district kept on average between $1 million and $2 million worth of customer funds in a non-interest-bearing checking account over the last two years. Generally, public agencies “sweep” their checking account balances at the close of business each day into overnight, interest-bearing money market accounts in order to generate more income without raising customer or taxpayer rates.

Lord’s attorney, Gary Pohlson, said Friday that his client “has never done anything that has cost the district a dime with regard to any of these accounts that he managed, and he has never done anything illegal with these accounts.”

Santa Margarita Chairman Don B. Schone said Saturday that “99.9% of this is new” to board members. “We want to look into it more Monday,” he said.

Later in the day, Schone said that not only had the district not lost money on the Mission Viejo National Bank deposit but had not lost money on any other transaction.

According to Maranto and others, Lord first became acquainted with Maranto back in the 1980s when the district had its accounts at Eldorado Bank in Laguna Hills. Maranto worked there from Feb. 8, 1987, to Aug. 22, 1988, according to Eldorado’s human resources department.

Shortly after he left Eldorado, Maranto moved to Mission Viejo National Bank to become senior vice president in charge of business development. Less than a year later, the Santa Margarita district moved its bank accounts to Mission Viejo National.

Both the district and Maranto stayed until the fall of 1991.

Then in September, 1991, Maranto joined First Los Angeles Bank as vice president/loan officer, according to a bank spokesman. Santa Margarita transferred its accounts to First Los Angeles a month later on Oct. 23 of that year, records show.

First Los Angeles’ nearest branch to the Mission Viejo-based district is in Newport Beach, about 15 miles away.

Last week, Maranto resigned from First Los Angeles.

In an interview, Maranto said he resigned “because I had something else I had been working on for the last couple of months.”

Through his lawyer, Lord denied there was any connection between Maranto’s movements and the district’s choice of banks.

“They didn’t move because of Mr. Maranto,” Pohlson said. “They moved because Mission Viejo bank was more willing to give them a favorable deal than Eldorado was. And then they moved to First Los Angeles, again not because of Mr. Maranto, but because Mission Viejo bank was having financial problems.”

But district Finance Director James W. Clark and Maranto say that the water agency’s accounts were moved because of the banker.

“The district followed me,” Maranto said. “Any problem they had I was always there to take care of it. . . . I took extremely good care of them.” He added, “Mike and I are friends.”

Water district officials say they never sought competitive bids for their banking business because it is not required by state law.

Documents reviewed by The Times in the San Diego County recorder’s office show that Maranto personally handled the paperwork for a $45,000 line of credit for Lord and his wife, Ingrid, at First Los Angeles Bank. The one-year credit line--secured by Lord’s home in Vista--was established on Jan. 14, 1992, and renewed on that same date this year.

Pohlson confirmed on Friday that Lord also has a $3,000 line of credit tied to his checking account at First Los Angeles. Lord likewise maintained his personal checking accounts at Mission Viejo National and Eldorado at the same time district funds were deposited there.

On June 6, 1990--while the water district had its funds on deposit at Mission Viejo National--the Lords obtained a $50,000 loan from that same institution, records show.

Though one banker familiar with one of Lord’s loans says it was negotiated at a “preferred rate,” Maranto and Lord insist that the latter did not get any special treatment in spite of their friendship and the considerable business the district brought to the different banks. The actual loan documents on file at the San Diego County recorder’s office do not reveal the terms.

“Of all the large deposit customers the bank has, Mike wasn’t treated any differently,” Maranto said emphatically.

Pohlson said Lord received no favors and didn’t expect any.

“He never went into the banks with any kind of attitude like they had to take care of him or something like that,” Pohlson said.

First Los Angeles officials declined to comment on or disclose any details about Lord’s personal loans.

“I have spoken with Mr. Lord and he has requested that any (requests for) information be referred to Gary Pohlson, his attorney,” said Thomas Tarter, the bank’s executive vice president.

The state Political Reform Act of 1974 requires that public officials disclose any loans totaling $250 or more from any one source on the annual economic interest statements they must file publicly every year. An exception is made, however, for any loan that is used to purchase, refinance or remodel the official’s primary residence.

Lord did not disclose the $50,000 loan from Mission Viejo National, or the $45,000 line of credit from First Los Angeles. Pohlson said the loans were exempt from reporting requirements because “they were tied to his house.”

One year after Lord borrowed money from Mission Viejo National, that bank was in need of a loan itself.

The bank’s parent corporation on July 16, 1991, disclosed that it was about to report a “substantial” second-quarter loss that would deplete most of its reserves and equity, and leave it with inadequate capital to meet federal requirements.

The bank was such a small institution that it sometimes required advance notice of a sizable Santa Margarita Water District deposit lest it be caught off guard without the collateral that is required by law to ensure the safety of customer funds.

The Office of the Comptroller of the Currency, which regulates national banks, had sent examiners to pore through Mission Viejo National’s records that summer of 1991. Four days after the bank announced the prospects of a second-quarter loss, its chairman and chief executive officer resigned.

Five days after that resignation, the Santa Margarita Water District bought its $2-million certificate of deposit, which had a 30-day term and carried an interest rate of 6%, documents show.

Finance Director Clark and district Controller Carol Megara contend that the order to deposit the $2 million came from Lord, that they challenged him about the wisdom of the transaction, but were told by Lord to carry out his instructions nonetheless.

Maranto was working at Mission Viejo National at the time.

Lord “has no recollection of (the certificate of deposit purchase) at all,” Pohlson said. “Anything he did was always appropriate and the district’s investments were always protected.”

Mission Viejo National closed on Feb. 28, 1992, but is still the subject of a federal investigation.

“Mission Viejo National Bank is under active investigation by the FDIC,” said Howard Cope, department head for investigations at the Federal Deposit Insurance Corp. in Irvine. “We are still trying to determine the causes of the failure of the institution.”

Both at Mission Viejo National and later at First Los Angeles, the district’s non-interest-bearing checking account almost always had an average daily balance exceeding $1 million.

The average balance was $1.9 million in 1991 and $1.04 million in 1992, records show. For the first three months of 1993, the district’s checking account balance is closer to $738,000 on average.

Regulators and bankers interviewed this week said it was not in the best interests of water district customers for their funds to be left in a non-interest-bearing checking account for months on end. Interest payments can ultimately help to defray costs to ratepayers, they said.

“Most major corporations or agencies wouldn’t just leave the funds in a demand deposit (non-interest-bearing) account,” said a First Interstate Bank spokesman.

“It’s not the best money management,” concluded Stanley Cardenas, chief deputy superintendent at the California Department of State Banking.

Because federal and state laws generally prohibit banks from paying interest on business checking accounts, depositors can ask those institutions to invest their money for them in overnight funds that do provide some kind of return.

“We invest it overnight,” Orange County Treasurer-Tax Collector Robert L. Citron said. “That is the usual way to manage money.”

Any benefit derived from the Santa Margarita district’s deposits, however, were less straightforward.

At the end of every month, district officials say, Maranto telephoned the district’s office and gave a figure--ranging from a low of $712 to more than $8,000--that district secretaries and the district’s Finance Department recorded as interest, records show.

The district would then send a bill for that amount to Mission Viejo National, and then later First Los Angeles, for “computer services,” records show. The banks, in turn, would send checks to the district in those amounts.

Finance Director Clark said he and others at the district were told the “computer service” invoices were a way of paying interest without calling it that.

“I was told our account would bear interest,” Clark said. “This was some mechanism initiated by the bank to provide us with interest.”

Clark said the water district never performed any “computer services” whatsoever for Mission Viejo National Bank. It has, however, done something that might be considered a computer service for First Los Angeles Bank, Clark said.

Around the time that the district moved its account to First Los Angeles, it purchased a machine that enables the district to encode the dollar sum of each check being deposited, so that the bank’s computers can automatically read the amount of each check as it is fed through its optical scanners.

Bankers and regulators interviewed this week said they have never heard of a bank paying a customer for such check-processing services. What usually happens, they say, is that a customer is given a credit, something on the order of three cents per encoded check, that can be applied only against service charges that have accrued on that customer’s account.

In other words, they said a customer could reduce service charges, but not actually earn money, by encoding the checks it deposits.

“We don’t pay anybody,” said Bill Christensen, senior vice president and manager of central operations at Union Bank. “That would be an unusual procedure.”

Maranto, however, said every bank does it.

“This is a standard practice in the industry,” he said.

Schone said the arrangement with the bank was “a prudent way for the district to save money for ratepayers in our banking relationship.”

Times staff writers Mark Landsbaum and Mark Platte contributed to this report.