County Was Told in ’93 of Treasurer’s Risky Strategies : Crisis: Audit also said Citron avoided oversight of his financial dealings. Three supervisors, ex-official don’t recall seeing report.
More than a year before Orange County’s bankruptcy debacle, the county’s auditor warned supervisors and the district attorney that Treasurer-Tax Collector Robert L. Citron was running his office without adequate controls and violated government codes to maximize returns with public money.
Obtained Thursday by The Times, the internal audit said Citron was making “risky and unusual transactions” behind the backs of the investment committee charged with advising him on the operations of the county’s investment pool.
The pool’s losses prompted Orange County this week to file for bankruptcy protection in the biggest municipal finance debacle in history.
The report--which covered the treasurer’s operations in 1991 but was only sent to the Board of Supervisors and Dist. Atty. Michael Capizzi in August of last year--warned that the county might be liable for some of Citron’s financial maneuvers.
Although the troubles highlighted in the audit were not the ones that precipitated the county’s financial collapse this week, they were early warnings that Citron engaged in high-risk investments, avoided oversight of his financial dealings, and was not above bending the law to improve earnings.
The county auditors said Citron made questionable transactions totaling more than $50 million “at the request of the (Wall Street) broker, Merrill Lynch, to help the brokermeet financial statement ratios required by the Securities and Exchange Commission.”
Reached for comment Thursday, Citron said he did not remember the audit. However, he emphatically denied that any transactions were made for the benefit of a brokerage.
“Absolutely not,” he said. Merrill Lynch officials could not be reached for comment late Thursday.
Three of five county supervisors contacted Thursday about the audit said they could not remember ever receiving it, nor were they aware of the criticisms contained in it. The other supervisors could not be reached for comment.
The audit said Citron--contrary to legal requirements--invested in below-investment-grade notes and in troubled banks, one of which went bankrupt the year of the audit.
Citron’s Aug. 23, 1993, response to the audit offered a rare glimpse into how the maverick treasurer--until recently respected nationwide for his cutting-edge investment strategies--viewed his role and the nature of his investments.
In his letter to the Board of Supervisors, Citron brushed aside suggestions that his office institute a chain of command that would provide some oversight and accountability for the investments that he was making.
Citron said he managed his “fiduciary responsibilities” based on “his own personality and abilities.”
“We believe the current management style, although not the norm for county government, is the best one for the treasurer-tax collector,” he concluded.
He did not dispute bending government codes to fit his investment needs, but noted that investing is “an inexact art.” What may be “risky” strategy for some, he said, was “prudent” for him.
“We believe none of the transactions to be risky or unusual,” Citron said. “We are not as conservative in our investment strategies as some of our contemporaries and because of that some transactions that are usual for us may in fact be unusual for others.”
In the interview Thursday, Citron said he also did not recall his written response to the report.
The audit was conducted by the office of Auditor-Controller Steven E. Lewis sometime in 1992. The office discussed the findings with Citron in July, 1993, and transmitted the report to other county officials the next month, after Citron made his response.
Lewis attributed the delays to staffing shortages.
“Due to lack of staffing in the office, we weren’t able to complete the audit and issue it,” Lewis said Thursday. Staff was “moved off of those jobs, and you have to put new staff on it, and you’re operating five auditors short.”
John Conley, a top assistant to Capizzi, said he was not sure that the district attorney ever received the report. “Even at this point, we’re not sure there have been any criminal violations” in connection with the investment pool’s operations, he said, noting that some violations of the government code call for civil, rather than criminal, remedies.
A shocked Supervisor Roger R. Stanton was more emphatic about never seeing the report.
“My god! Was it addressed to the Board of Supervisors?” Stanton asked. “We didn’t have it, we don’t have it, we have never seen it.
“We don’t throw things like this away,” Stanton said. “The simple fact of the matter is that if it was distributed like that, why didn’t somebody say, ‘Hey, did you see that?’ I’m just baffled. It was not in the office, and didn’t come to the office.”
Stanton said he could not understand why the auditor delayed circulating the report.
“If you’ve got damaging information about the treasurer, why would you wait nearly two years before releasing it?”
Supervisor Thomas F. Riley said he did not remember receiving the report nor had he heard of any trouble with the fund until “several weeks ago.”
Supervisor Harriett M. Wieder also said that she does not recall ever seeing the audit report. When told of the auditor’s findings she said: “What? You’re kidding. I’m sitting here with my mouth open. I’m absolutely shocked.”
She, too, said that she was upset that the report, which was conducted in December, 1991, was not released until August, 1993. Wieder said she did not accept Lewis’ explanation that his office was understaffed.
“That’s the weakest excuse I’ve ever heard,” she said.
Bruce Bennett, the county’s bankruptcy attorney, said he had only heard rumors about the audit. “I haven’t seen it,” he said late Thursday. “I’m sure I will see it sometime soon.”
Lewis’ office was in the process of drafting a follow-up report gauging Citron’s progress on the 1993 recommendations when the county filed for bankruptcy, said John Nakane, chief of internal audits. He said the report will be completed and should be released soon.
Lewis declined to comment Thursday on the contents of the 1993 report, but said his department performed several internal audits of Citron’s office.
“We’re trying to stop the bleeding now,” he said. “What happened in the past will come out a little later down the line.”
Nakane, who oversaw the audit, said Thursday he doubts that more regular audits could have prevented the current crisis.
“Our job wasn’t to review the portfolio per se. We looked at internal controls,” he said. “Bob invested the money. I don’t think our work could have averted (the losses).”
Nakane said that while the audit is “critical of certain things that (Citron) did,” it did not reflect extreme concern at the time on the part of the auditor controller’s office.
But Kaye Mirabelli, president of the state Municipal Treasurers Assn. and treasurer of the city of Ventura, said the criticisms contained in the audit “aren’t things that I’ve ever found in our audit. . . . I don’t remember anything like that, especially in regards to the language.”
The internal audit was the second to be conducted in the past decade. A 1986 audit also criticized Citron’s autocratic investment system, which, it noted, was “designed and carried out only by the department head”--Citron himself.
The 1993 report repeated the criticism, saying Citron “made all day-to-day investment decisions and also executed the transactions without anyone else involved to provide segregation of duties or oversight.” Until this year, the investment fund--which holds funds from more than 180 cities, school districts and agencies, in addition to the county’s own funds--sharply outperformed similar pools operated for local government agencies.
An internal investment committee was formed to provide “input on investment strategy and types of investments” being considered. But when Citron “deviated from guidelines established by government code or the investment committee, he did so without consulting anyone in the treasurer’s office or on the committee,” the audit said.
When it was found that Citron had violated government codes in making investments, he told auditors that “the instances were conscious decisions made to maximize returns,” the report said.
According to the audit, Citron violated government codes by:
* Holding $125 million in medium-term notes rated BB-/BB when law requires that such notes be rated A or better. BB- bonds are considered predominantly speculative, according to the Standard & Poor’s rating service.
* Invested $80 million in Baa1-rated medium-term notes issued by a Dutch corporation, when law only allows investment in such notes if rated A or better and issued by a U.S. corporation.
* Over-invested surplus money--as much as 44.6%--in medium-term notes, when law allows that only 30% of surplus money be invested that way.
* Over-invested surplus money in negotiable certificates of deposit.
According to the audit report, Citron invested $75 million in a negotiable certificate of deposit from Columbia Savings & Loan, which went bankrupt in 1991.
While not in violation of law, the report said that investment could have resulted in significant losses of public funds, and it chided Citron for not explaining it to the internal investment committee.
Mirabelli said the rating of medium-term notes can change over time and may be different at the time of an audit than when the notes were purchased. But she said she would never purchase notes rated lower than A, because it is “not in compliance with our investment policy or government codes.”
In one of the report’s more incendiary findings, auditors said they had discovered that several transactions were made solely to benefit Merrill Lynch, a favored brokerage.
In addition to $50 million that changed hands between June and July of 1991 so the giant Wall Street firm could meet required SEC financial statement ratios, the report refers to a December, 1991, letter to Citron that detailed similar transactions in December, 1990, and January, 1991.
That letter recommended that Citron ask the county counsel to investigate “possible liability . . . in which such transactions could result.”
The auditor recommended that Citron “decentralize” investing and establish a chain of command “that helps to promote adequate review of decisions.” It also urged that Citron run his “risky” or “unusual” transactions by the investment committee and adhere to government regulations in his investment strategies.
Lewis said Thursday his office was sufficiently concerned about potential problems with the county’s now-bankrupt investment pool that officials also twice made “special requests” that outside auditors take a closer look at the portfolio.
Lewis said he made the “special request” of KPMG Peat Marwick last year and again this year. This year’s external audit--which had been due to be released late this month--may not be completed because of the county crisis.
“I didn’t contract with them to look at a detailed analysis of the portfolio. On the other hand, because there had been concerns, you just say, ‘Look at this particular area.’ Then they spend a couple of extra hours on it,” he said. “For the last two audits, that has been a special request,” Lewis said.
Times staff writers Matt Lait, Eric Lichtblau and Jodi Wilgoren contributed to this story.
