ORANGE COUNTY IN BANKRUPTCY : Warnings Going Back to 1982 Went Unheeded

The first warnings that someone besides county Treasurer-Tax Collector Robert L. Citron needed to know how he was investing the public’s money came in an internal audit a dozen years ago. Citron, the report said, needed to document his investment policies and procedures.

The next year, an outside auditor made the same recommendation. And in 1985, a grand jury stated it more bluntly: Someone should be looking over Citron’s shoulder.

“There appears to be little or no review of investment activity by the County Board of Supervisors, chief administrative officer or auditor-controller,” the grand jury concluded after conducting an investigation of Citron’s office.

The grand jurors issued this now ominous warning:

“The county would face a potentially dangerous period of transition if the experience of the present leadership were to be lost. This risk is particularly evident with the treasurer, an elected official, who personally manages an investment portfolio well in excess of $1 billion.”

The grand jury report went on to say: “Orange County investment policies, processes and cash forecasting procedures are not documented. By contrast, Los Angeles County has a well-defined working manual which explains in detail all investment policies and procedures.”

More warnings came in an internal 1986 audit. Finally, in a 1993 internal audit, came the harshest admonition yet: Citron was knowingly bending the law to maximize returns on the now-bankrupt county investment pool, making “risky” financial deals and refusing to consult a committee charged with overseeing his investments.

But for nearly a decade, no one heeded warning after warning--although they came from inside, outside and from the watchdog grand jury--that Citron was holding all the cards in the treasurer’s office, and not allowing anyone a peek at his hand.

Now, after the biggest municipal financial collapse in the nation’s history, a simple question begs an answer: Why didn’t someone react to the mounting criticism and 12-year push for oversight of the county’s maverick treasurer? Was everyone in the fund blinded by the money that Citron was earning for them until his investments headed south?

Citron, who has remained largely in seclusion since Sunday, referred all questions to his newly hired attorney, David Weichert, a former federal prosecutor turned criminal defense attorney. Weichert defended one of the executives in Charles H. Keating Jr.’s fraud-ridden financial empire and a LAPD detective who was one of six narcotics investigators tried some years back on federal conspiracy and theft charges.

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Supervisor William G. Steiner, who joined the board four months before the critical 1993 audit came out, and board veteran Supervisor Thomas F. Riley acknowledged that they had received copies of the audit, but did not remember it.

“It should have been a huge red flag,” conceded a pained Steiner, who unearthed the audit in his office after news reports Friday morning. “(The audit) did not get on the board agenda. It simply was not visible.”

“There was nothing here that required a policy change,” Riley said. He added that he did not think the audit was overly critical of the treasurer’s office.

“Obviously, I didn’t,” Riley said, noting, however, that his office gets deluged with paperwork every day. “I see an awful lot of things in this office. This was Aug. 5, 1993. I’ve almost lived a lifetime since then.” The three remaining supervisors said they could not locate their copies of the audit.

Supervisor Harriett M. Wieder said that in hindsight the 12 years of warnings should have packed the wallop of “a 2-by-4”--had she heard of them.

“In the environment in those days, he was not questioned,” she said. “I feel frustrated that I was not in control. . . . I don’t remember the grand jury report. I don’t know, and I don’t remember.”

But Wieder, who was on the board when the 1985 grand jury report was made public, said Citron was making so much money that no one thought to question the man Wall Street praised and certainly not about affairs they were hardly qualified to understand or judge.

“We’re not Wall Street brokers,” Wieder said. “We rely on the people we hire to do it for us.”

On Friday, she questioned whether the people charged with oversight needed some oversight themselves.

Wieder said she just found out Friday that the monthly reports of investment activity that are required under state law to be distributed to board members by the treasurer ceased three years ago, “and no one told us.”

She also criticized Auditor-Controller Steve E. Lewis for not placing the audit and Citron’s response to it in the public realm. The audit and answer were marked “Not for Board Agenda” and were distributed directly to supervisors, the district attorney and the county administrative officer. But they were not included in the packet of board material that is made public before the weekly board meetings.

“(Lewis) might be covering his rear. How do I know?” Wieder said.

She fired off a letter to Lewis Friday afternoon, criticizing him for not personally alerting board members to the internal audit’s inflammatory contents.

“I am shocked and disbelieving that you did not ensure that it would be brought to our attention personally or to (the attention of) the county administrative officer,” she wrote. “I can only conclude that it was carelessness, indifference or bureaucratic evasiveness.”

Wieder demanded to know why it took 18 months to complete the internal audit, why the findings of the report were not pursued more aggressively, and where the standard six-month follow-up report was.

Lewis declined to comment on the audits Friday, or to answer questions about Citron’s efforts to comply with his office’s recommendations. He was also unavailable to comment on how he could issue such a critical report of Citron in August, 1993, and then offer a ringing public endorsement of Citron the next spring when Citron drew his first political challenger in 24 years in office.

Supervisor Gaddi H. Vasquez said he did not recall getting the report and did not review it until Friday.

“It’s a mystery to me as to why we did not see the report or why it would not have found its way to us,” he said. “We didn’t have it.”

But he said the report did not necessarily warn of impending crisis.

“It is not uncommon for some of these audits to contain differences of opinion, where the auditor-controller suggests certain methods of operation, and the other department head disagrees,” he said. “When you look to all the people who have been involved in investing, participating, evaluating, monitoring the investments, there were no glaring signs or signals being transmitted that something was awry.”

The internal audit specifically warned supervisors that 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.”

Citron also told auditors that when he violated government codes “the instances were conscious decisions made to maximize returns.”

Orange County Dist. Atty. Michael R. Capizzi said Friday that he did not know if his office had received a copy of the audit. However, after reviewing it, he said there was nothing in it that would have “triggered action” by his department. If laws were broken, they were of a civil, not criminal, nature, and were not the responsibility of his office.

Vasquez said that because he did not begin his term on the board until 1987, he could not comment on the earlier audits or the grand jury report.

But he said someone should have taken note of the repeated criticisms over the years.

“I can’t judge as to whether it could have averted the crisis. If there were suggestions or deviations from government regulations or laws, then a red flag should have gone up by those who had the opportunity to read it,” he said.

He said allegations that Citron violated state law concern him now, but “I did not have the benefit of that report, nor was it ever brought to my attention.”

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According to a five-member group of grand jurors charged with investigating Citron’s office’s investment procedures in 1985, county supervisors should have started some reforms a decade sooner.

Although the jurors found that Citron was “making effective use of the variety and sophistication of the broad range of investment instruments,” they were concerned that no one but Citron knew how he juggled the tools.

As did the audits in 1982 and 1983, the grand jury urged that Citron put his investment style on paper and “maintain written procedures covering all major areas of the investment and cash management functions” because his activities “affect virtually all of the county’s operations.”

The grand jurors also urged that Citron provide supervisors with monthly reports detailing the types of investments, the institutions they were from, the dates of their maturity, the amounts of deposit, the current market value for all securities with a maturity of more than 12 months and the rate of interest.

An internal audit in 1986 conducted by the county auditor-controller echoed many of the same concerns, saying that many of the complicated financial maneuvers in the treasurer’s office “are often performed and understood by only one person.” It again called for written policies and procedures.

The 1986 audit refers to many of the findings of the 1982 internal audit, the outside 1983 audit and the grand jury report.

Responding to the 1986 audit, Citron said that written policies and procedures are prepared to “solve a problem in a particular area” as problems arise, adding that “in these difficult economic and budgetary times we do not deem it appropriate to request resources specifically for this purpose.”

The auditors bluntly said Citron “should develop policies and procedures prior to the occurrences of problems rather than in response to them.”

The audit also criticized Citron for failing to submit investment policies for 1986 and 1987, despite a board resolution to do so.

“The treasurer has obtained good yields on his investment of county funds,” the auditors said. “Even so, we believe it prudent for the Board of Supervisors and the county administrative officer to become more involved in the county’s investment program.”

And in another now-eerie warning, the auditors cautioned that “the investment function has a tremendous impact on the funding of the county’s entire operations and the added participation of the board and CAO should help ensure that investment strategies and policies best serve the county.”

The audit recommended setting up an investment committee as a way of “assuring a long-term, consistent investment strategy.” It is this committee that 1991 auditors found that Citron was pointedly dodging when he made “risky” or “unusual” investments. Until last week, the committee, according to the 1991 audit, was made up of Citron, now-Acting Treasurer Matthew Raabe and County Administrative Officer Ernie Schneider.

On Friday, Schneider said there was “no way” the committee could have forced Citron to do anything.

“I don’t believe the board can be held responsible for what another elected public official has done,” he said. “I can’t do everyone’s job. I can only do my job, and I think I do it pretty good. Until this episode, we have done stellar work.”

In his response to the 1986 audit, Citron argued against establishing an investment committee, saying that such a panel “not only removes the investing of public funds from those most capable to perform this important task, it would also make the county unable to react quickly to investment opportunities, which could materially affect interest earnings.”