ORANGE COUNTY IN BANKRUPTCY : Citron Managed Separate Pools : Investors in ‘Safer’ Fund Want Their Money Before Those in ‘Commingled’ One

Orange County treasurer’s office records show that Robert L. Citron managed two separate funds--a highly leveraged investment pool and a safer pool earning less interest--but the assets are being liquidated as if there were just one fund.

The decision to treat all of the fund’s investors alike has touched a nerve among some officials at about a dozen public agencies that specifically instructed Citron to put more than $1 billion of their money in less risky investments.

In many instances, the agencies were forbidden by law from placing their funds in the kind of dicey, high-yield bets Citron made.

In recent days, the question of whether a separate, safer pool existed--and whether its investors deserve to be among the first in line to get their money back--has emerged as a contentious issue amid a storm of confusion.

“A number of us are not going to accept that,” Jim Kenan, Orange County Transportation Authority finance director, said of the decision to treat investments in the bond pool and the riskier “commingled pool” equally during the bankruptcy proceedings.

“It was clearly our understanding that this was a bond fund, no risk. You could throw a dart at a board and earn the type of earnings we expected from the bond pool,” said Kenan, whose agency had $559 million in the bond pool and $533 million in the commingled pool as of Nov. 30.

“A bond fund is a construction fund, a short-term investment, and as a result it shouldn’t have been subjected to these riskier securities,” Kenan said. “We expect that to be honored.”

Following a public records request by The Times, county officials on Tuesday provided documents indicating that Citron--who resigned the day before Orange County became the largest municipality ever to file for bankruptcy protection Dec. 6--had at least two distinct funds.

Fund No. 683 was the “commingled pool,” the larger and more risky of the two, with about $6.15 billion as of Nov. 30, according to county records. Fund No. 690 represented those monies that had been placed into safer securities, the so-called “bond pool” which contained about $1.27 billion at the end of last month.

A county official who requested anonymity said the code numbers were used to track the performance of the various securities in each pool. “The different fund numbers were for accounting purposes,” the official said. “Each transaction was posted to an account.”

Jane M. Eddy, director of public finance for Standard and Poor’s rating agency, said she had been told by Assistant Treasurer Matthew Raabe as recently as Monday--and has understood for years--that the county ran two distinct pools.

“There’s no question that the county had two separate (investment) pools, and they were treated separately,” said David Wiechert, Citron’s attorney. “Anyone who received the reports (from the treasurer’s office) would see that there were two separate funds.”

But Bruce Bennett, the county’s bankruptcy attorney, said Tuesday that despite internal records showing the two distinct funds, there is no documentation of a group of less-risky investments. That, in part, is why investors are being treated the same in the liquidation process--regardless of whether some took more risk than others.

Treasurers in other California counties said Tuesday that they have accounting strategies similar to Citron’s, keeping separate records internally for their bond pool, but not necessarily maintaining separate bank accounts.

“For us, right now, we have two funds,” said Los Angeles County Treasurer Larry Monteilh. “At the banking level, they’re . . . not going to have detail with respect to what’s in what account.”

Tom Ford, assistant treasurer-tax collector in Sonoma County, called such a system “normal practice.”

“The only records on the separation of the pool are here in our office. Nobody external could see the difference between the two,” Ford said. “Internally, there are lots of things that are different, but externally it would look as if it’s the same fund.”

The confusion over Orange County’s “bond pool” stemmed from a meeting last Thursday, when Bennett announced at a meeting of investors that all parties would be treated the same during the liquidation of the county’s assets--regardless of whether the funds were in safer investments.

When Bennett explained that he had found no evidence of separate accounts, some officials mistook him to mean that Citron had pooled all the funds and had no way of accounting for whose money was in what type of investment.

“People were going nuts,” said one official who attended the session. “They were hearing for the first time that it was not separated. People holding over $1 billion . . . thought they were in very, very safe securities.”

Added a bankruptcy attorney who asked not to be identified: “About a half-dozen people nearly lost their lunch when he said that.”

In most instances, the monies in the “bond pool” were there by law: Federal tax codes prohibit proceeds from tax-exempt bonds--such as those sold to finance many municipal construction projects--from being used to earn high rates of interest.

If the proceeds from those tax-exempt bonds earn more than a certain level of interest, the excess must be given to the federal government.

“The use of tax-exempt money has to be reported separately. The income from that has to be reported separately. And if you make any money on it, you’re supposed to rebate the difference,” said Zane B. Mann, publisher of the California Municipal Bond Advisor.

Bennett said he has no evidence that Citron violated the tax code, and that county officials have more investigating to do before they will be able to unravel any discrepancies between the internal and external investment records.

So while all investors are being treated equally for the first rounds of cash disbursements this week, those with money in the “bond pool” may stake a higher claim later.

“We are still studying. We are still gathering facts,” Bennett said. “This is something we are going to have to analyze very closely and discuss with a lot of players.”

Kenan and several other investors said they will fight any plan that treats bond pool and commingled pool investments alike.

Though county officials believe the overall investment pool has plunged $2.02 billion in value--about 27%--this year, some of the safest securities in the portfolio were sold last week for more than 90% of their original price.

“If they’re saying there’s a 27% loss on this risky pool, if I have to accept that, I accept that. But on the bond pool, our loss should not be 27%,” Kenan said. “It’s unacceptable for them to say that 27% of that (bond pool) money is no longer there. There’s a big difference between a 27% loss on $560 million and a 7% loss.”

Another official whose agency put money in the bond pool agreed that “people that were told their money was segregated in a safer fund should get it first,” adding that “they bargained for less risk because they got less interest.”

Short of a vague monthly statement listing the performances of the “bond pool” and the “commingled pool,” many officials said they received little other records from Citron. They received verbal assurances from Citron’s office that the money would be invested according to the restrictions in the tax codes, and assumed he would execute their wishes.

“We don’t have a thing in writing,” said Gene Farrell, vice chancellor of administrative services at Coast Community College District. “We just knew how much interest they were going to pay us.”

Some officials, in hindsight, believe they should have asked for more--particularly after questions were raised about the pool’s stability earlier this year. But, in part, they were lulled by Citron’s longstanding reputation as a shrewd and successful money manager.

“No, we didn’t follow up. Yes, we should have,” Newport Beach City Manager Kevin J. Murphy said. “But I don’t know that there was any reason to do follow-up until the bankruptcy.”

Newport Beach attorney G. Larry Engel, who represents the interests of the city of Santa Barbara, among others, said: “No one expected that after all these years that they couldn’t rely on the representations of the Orange County treasurer.

“Everyone assumed his representations were true,” Engel said. “Who would have ever dreamed that Orange County was going to file Chapter 9? I don’t know anybody that would have foreseen this disaster.”

Farrell said he knew all along there was no separate bank account for the safer funds, but that he was satisfied as long as Citron kept track internally.

“We’re not in a squeeze on our $2.6 million anyway till the year 2004,” he said. “We think they may have this mess sorted out by then.”

Times staff writers Debora Vrana and Greg Johnson contributed to this report.

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Pool Tables

Records show former Orange County Treasurer-Tax Collector Robert L. Citron managed funds in at least two different kinds of investment pools--a “commingled pool,” which contained riskier investments, and a “bond pool,” which had safer, less leveraged investments. The following 13 public agencies had invested the following amounts in the safer of the two pools as of Nov. 30:

Agency: Amount Orange County Transportation Authority: $559,733,372.30 Transportation Corridor Agencies: $296,294,198.03 County of Orange: $204,659,991.48 Orange County Sanitation District: $49,311,044.51 Coast Community College District: $2,555,730.02 Irvine Unified School District: $1,961,245.96 Cities Santa Ana: $94,211,999.52 Newport Beach: $13,631,537.16 Santa Barbara: $11,780,015.49 Yorba Linda: $6,487,112.83 Water Districts Moulton Niguel Water District: $25,017,352.35 Midway City Sanitary District: $2,057,712.34 Santa Margarita Water District: $184,898.62 Total: $1,267,886,210.61 Source: Orange County treasurer’s office