3 on O.C. Board Indicate Raabe Is on Way Out

Less than three weeks after Matthew Raabe took control of the embattled Orange County treasurer’s office, a majority of the Board of Supervisors--which pressured Treasurer-Tax Collector Robert L. Citron to resign--said Wednesday that it’s time for acting Treasurer Raabe to go too.

Raabe, Citron’s chosen heir apparent, was initially hailed for alerting the county to problems with the fund in early November.

But county supervisors said Wednesday that they could not ignore reports that Raabe continued to aggressively reassure other governmental investors--even as the fund lurched toward collapse in October--of the investment pool’s ability to cover any potential losses.

“We need to restore credibility to the office,” said Supervisor Roger R. Stanton.

Supervisors Stanton and William G. Steiner said Wednesday that they favor installing as interim treasurer Thomas E. Daxon, the former Oklahoma auditor who was brought in Dec. 12 as a special consultant to the treasurer’s office.

“There is such a cloud over the treasurer’s office,” Steiner said. “It’s time to appoint Daxon.”

Supervisor Gaddi H. Vasquez, who becomes chairman of the Board of Supervisors in January, said that while Raabe currently serves as an important “link” in unraveling Citron’s investments, he most likely will not be part of a post-bankruptcy treasurer’s office.

“A change will occur,” said Vasquez, who declined to elaborate.

Depending upon the outcome of ongoing investigations of both Raabe and Citron by the Securities and Exchange Commission and the Orange County district attorney’s office, supervisors are considering everything from Raabe’s reassignment to complete removal.

Vasquez said a decision about a leadership transition in the office will occur “in a matter of days.”

While it remains unclear whether Raabe had a hand in devising the risky investment strategies that torpedoed the multibillion-dollar fund, interviews and documents indicate that he was a devoted disciple of Citron, fervently preaching the reclusive treasurer’s investment gospel to the fund’s inglorious end.

For 10 months this year, while interest rates rose five times and the treasurer’s office relied increasingly on a stepped-up series of borrowings for cash, Raabe, 38, crisscrossed the state, reassuring gatherings of city treasurers and other participants in the investment pool that the fund was sound.

In April, after the Federal Reserve Board had increased interest rates three times for a total of three-quarters of a percent, Raabe personally sold skittish Newport-Mesa Unified School District officials on the idea of rolling over a $47-million loan they had taken out to invest more heavily in the fund.

And at several meetings of public finance officers and treasurers--including one in mid-October--Raabe dismissed questions about the fund’s risks, saying the county had $1 billion to $1.5 billion in “overnight money” to be used in case an interest-sensitive investment went awry, or investors in short-term county bonds or notes demanded their money back.

“You never, ever got a sense that they weren’t confident,” said Howard Longballa, the Placentia finance director. Raabe “said, ‘Yes, the pool has exposure if interest rates rise,’ but that (the county) always kept liquid just for that reason. He said they had a billion set aside.”

Raabe, who is under scrutiny for possibly misrepresenting the fund’s solvency to investors, would not comment Wednesday on a possible shake-up in his office.

But, in his first public comments about his involvement in formulating and carrying out the county’s failed investment strategy, he said Citron made all such decisions alone, and that he had virtually no input into the process.

“It would be fair to say that anywhere I went I was explaining what Mr. Citron’s investment strategy was,” Raabe said. “I never had anything to do with devising investment strategy.”

But investors argue that if Raabe wasn’t designing the car, he was smoothly selling it--and neglecting to tell them that this year’s version could turn out to be a lemon.

“I do not believe he was just a lieutenant responding on the directions of the captain,” said Edward H. Decker, a Newport-Mesa school board member who met with Raabe in April.

“I came away with the feeling that he was as much a part of the scheme or proposal as his boss was.”

Raabe was certainly Citron’s chosen successor in the eyes of many county officials.

He joined the auditor-controller’s office 10 years ago, but switched to the treasurer’s office in 1987 because there was a greater opportunity for advancement, his friends said.

When Citron’s longtime deputy Ray Wells retired, Raabe, who had earned his certified public accountant certificate, became the assistant treasurer in 1993.

Steiner said he remembered asking County Administrative Officer Ernie Schneider last spring if there were plans for succession in Citron’s office, which he considered “a one-man show.”

Steiner said he was led to believe Raabe was being groomed for the job. “He was the heir apparent,” Steiner said.

In a Sept. 14, 1993, memo to the supervisors accompanying his financial report, Citron himself devotes half a page to praise of Raabe, who is “directly involved in the day-to-day operation of the Treasury.”

Citron wrote that Raabe “is involved or aware of the daily decisions being made. He is responsible for implementing investment decisions. . . . I thought you would be interested in knowing that there is in the county treasury a person such as Mr. Raabe who can actively manage and operate the county treasury.”

Raabe also served as Citron’s front man. Calls to Citron were invariably answered by Raabe. Citron signed most requests to county supervisors to issue notes, but Raabe was the person the supervisors were asked to contact if they had any questions. And while Citron was an awkward speaker, who stuttered when he got nervous, Raabe could smoothly explain the Orange County investment way to groups of county and municipal treasurers.

“You didn’t get to talk to Citron. Citron is the mountain,” said one investment banker, who asked that his name not be used. “The oracle is Matt Raabe.”

City and county treasurers and finance directors say Raabe’s attitude about the investment fund strategies was one of “don’t try this at home, kids. Leave it to the professionals.”

Raabe really seemed to click into high gear, they said, after Citron’s hotly contested election campaign this year, when opponent John M.W. Moorlach said the value of the pool had already dropped from $7.5 billion to $6.3 billion.

“There was a sense of urgency,” Newport-Mesa’s Decker remembered. “He wanted to make sure he delivered the party line and we rolled over our $47 million.”

The previous June, Raabe had helped sell Newport-Mesa and three other school districts on joining forces to issue $200 million in one-year bonds to raise cash to increase their investments in the fund, and to offer an identical $200-million issue the following year for the same purpose. A letter to each of the districts assured them: “You will not . . . have risk of any market loss.”

When the first bonds were about to be redeemed, and Raabe was selling them on the second issue, Newport-Mesa officials began raising questions about the safety of their investment. Raabe made the same promise orally, Decker recalled, and pledged to put it in writing as before. But no such written guarantee ever arrived.

In a meeting with district officials, Raabe “became rather intense,” Decker said. “I said I didn’t see how he could guarantee us the money. In order to guarantee us or anyone in the fund, he’d have to take away money from someone else. . . . At the time, I think he knew the fund was in trouble.”

That same month, Raabe wrote a letter to Peter J. Oeth, general manager of the Tri-Cities Municipal Water District, describing his office’s investment strategy: “The pooling of funds allows us to concentrate more monies on these investments while using a shared liquidity of $1.5 billion, which is constantly kept available.”

Raabe said the treasurer’s office had “several strategies in mind” should there be an “extremely unlikely” rise in interest rates that imperiled some investments. “Please be assured,” Raabe wrote, “the investment pool is strong.”

Just three months ago, on Sept. 26, Raabe spoke about investing public funds at the annual California Public Finance Conference in Santa Monica. Orange County had just issued $320 million in pension obligation bonds backed solely by the county’s good name. A large portion of the bonds had interest rates that changed weekly with prevailing market rates, and allowed bondholders to demand their money back on only seven days’ notice.

Raabe told the finance specialists that Orange County had a deserved reputation as an “aggressive” investor but had not crossed the line to become “an overly risky investor.”

He is quoted in The Bond Buyer, a trade publication that sponsored the conference, as saying that the county had $1 billion in reserve “in case we’re wrong on some of our investment guesses. . . . “ But a little over two months later, that billion-dollar reserve was no place to be found, and Orange County defaulted on the “seven-day floaters” issued in the pension bond deal.

In October, Raabe twice reassured outsiders that the fund could handle any problems, even dropping in on officials in Mountain View, which had $33.9 million invested in the pool.

“He said things were fine. Everything was OK,” remembered Patty Kong, the city’s assistant finance director.

But within weeks, Raabe, the fund’s most visible booster, had turned Citron in. He went to Auditor-Controller Steve E. Lewis with concerns that Citron continued to take huge investment gambles while the pool teetered on the edge.

“He told me directly, and he told Ernie Schneider, that he had confronted Bob Citron about (certain) transactions,” Steiner said. “He said he told him to stop this train going down the track out of control. Stop these transactions. Citron assured him that he would.”

Steiner said Raabe came forward after “documents came across his desk on the first of November and he saw that Citron was still trading big time.”

Steiner said he has mixed feelings about removing Raabe because he “prevented the ultimate meltdown of the fund.” But on the other hand, Steiner said, the soft-spoken accountant also made “a lot of questionable” representations to investors.

Raabe won’t comment on what triggered him to go to county officials.

Right now, he said, he is too busy helping various investigators, accountants and auditors dig through the remains of the pool.

Times staff writers Matt Lait and Lee Romney contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

More Coverage of O.C. Bond Crisis

* OTHERS AT HIGH RISK--Four other California counties maintain investment funds that carry a high degree of exposure, a report found. A42

* U.S. HEARINGS--Three congressional committees plan to conduct hearings on the crisis and related issues and ponder stricter regulations. A42

* LESS MONEY--The county auditor told officials in the area’s cities that a property tax revenue disbursement will be smaller than anticipated. A43

* EXECUTIVE HELP--Business leaders and UC Irvine officials joined forces to offer the county advice on budget and policy decisions. D1