Citron Says He Did Not Calculate Risks : Orange County: Apologizing for crisis, he tells Senate panel he relied too much on professional advice. But Merrill broker says ex-treasurer called the shots.

Portraying himself as an unsophisticated financial neophyte who relied too heavily on the advice of others, former Orange County Treasurer Robert L. Citron offered a public apology Tuesday before a special state Senate committee, declaring that the county’s financial crisis is a burden he will carry “the rest of my life.”

Citron--at times appearing nervous and hesitant but defending his performance over 24 years in office--said he had no contingency plan to handle the sort of investment meltdown that prompted the county to file for bankruptcy protection last month. Indeed, Citron asserted that he never had analyzed what would happen if interest rates rose or investors pulled their money out of the county’s investment fund.

“I was so sure of what I was doing based upon the many years of success,” Citron, 69, told the members of the Senate’s Special Committee on Local Government Investments. “In retrospect, I find that I was not the sophisticated treasurer I thought I was.”

Citron joined a parade of elected leaders, investors, auditors and brokers to the witness chair--almost all of whom sought to shift blame for the financial debacle to others, including Citron, county supervisors and the Merrill Lynch investment house.

Noting that he never obtained a college degree and had little formal training in government finance, Citron said he learned about some of the risky investments he pursued while on the job.

His assistant, Matthew R. Raabe, said he likewise did not have a clear understanding of the workings of the investment fund that the treasurer’s office managed for the county and 186 school districts, cities and other agencies and was not aware of how swiftly it could collapse.

“I did not, for instance, understand how quickly and to what extent the structuring of individual securities would affect the portfolio as interest rates continued to increase,” Raabe said. “I have come to realize in the past 2 1/2 months that those of us who are untrained in the complicated and somewhat bizarre aspects of derivatives and government agency securities cannot begin to suggest how to regulate their use.”

The fund lost over $2 billion last year as Citron’s highly leveraged investments in securities sensitive to interest rates tumbled in value while the Federal Reserve Board was raising rates six times.

Raabe, who became Citron’s assistant in March, 1993, bristled at suggestions that he encouraged any entity to invest in the fund or helped direct its investments.

“I was not the person who defined the investment strategy or made investment decisions,” Raabe said.

Citron also pointed a finger at others--especially Merrill Lynch, the brokerage that sold the county about 70% of the securities in its portfolio.

“I relied on the expert advice of financial professionals,” Citron said. “In retrospect, it is clear that I followed the wrong course.”

In particular, he dealt almost daily with Merrill broker Michael G. Stamenson, who also testified. Both men are under investigation by the Securities and Exchange Commission, and the debacle is the subject of numerous other state and federal probes.

Though Citron was describing Merrill Lynch as the county’s de facto “financial adviser,” officials of the firm said Citron made all decisions related to investments.

Stamenson expressed regret at the county’s loss, but said Merrill was not at fault.

“Neither I, nor anyone else at Merrill Lynch, designed or structured the county’s investment strategy or controlled the county’s investments. Mr. Citron did,” Stamenson said. “One thing should be clear--Bob Citron controlled the Orange County portfolio. Merrill Lynch did not. I did not.”

The county sued Merrill Lynch last week, seeking $2.4 billion in damages and alleging that the firm lured Citron into exotic investments that broke state law and pushed the county into collapse.

Testifying at opposite ends of a long day, Stamenson and Citron formed mirror-image bookends, offering opposite perspectives on many key issues.

During more than an hour of questions and answers, Stamenson described Citron as a “sophisticated, experienced and knowledgeable” investor and said neither he nor his firm ever acted as a financial adviser to Orange County.

Countering Citron’s argument that Stamenson led the former treasurer into risky investments, such as reverse repurchase agreements, Stamenson said he had learned much from Citron, adding, “He was doing reverse repos before I even knew what the term meant.”

Stamenson flatly denied the suggestion by Citron, and other county officials, that Merrill Lynch served as an architect of the investment strategy.

“I had absolutely no input, at all, in the investment strategy,” Stamenson testified. “I did talk to Mr. Citron every day. . . . Mr. Citron had direct relationships with every major institution on Wall Street.”

But the senators grilled Stamenson on the distinction between giving advice and being a financial adviser, insisting the difference was semantic, not substantive.

“What the hell were you talking about with this man every day?” demanded Sen. William A. Craven (R-Oceanside), the co-chairman of the committee. “To me, that’s advice.”

Stamenson said that although he spoke each morning at about 8 a.m. with Citron, he was not the former treasurer’s “first call.” That spot was reserved for Albert J. De Spirito, a senior vice president with responsibility for government securities at Dean Witter & Co.’s Los Angeles office.

Wall Street sources said De Spirito worked as a salesman in the Los Angeles office of Salomon Bros.--the county’s financial advisory firm--until about 1981. Subsequently he worked for the firms of First Boston and Drexel Burnham Lambert before joining Dean Witter, also in Los Angeles.

Salomon sources said they do not know whether De Spirito had any dealings with Citron while working at that firm, although they observed that his tenure there would have predated the development of the derivatives business. Citron said during Tuesday’s hearing that he has known De Spirito since 1974 and had consulted him often.

De Spirito could not be reached for comment Tuesday at his office or his San Marino home.

Records show that Dean Witter was lead manager or underwriter on $150 million in Orange County bond issues between 1990 and 1994, making it the county’s eighth largest underwriter during that period.

Campaign records show that Dean Witter or its employees contributed $4,850 to candidates for countywide offices, including Citron, from 1986 to 1994. De Spirito himself contributed $150 to Citron’s campaign in 1986, when he identified himself as manager of Pacnet Securities, a Century City firm that is defunct. Pacnet also contributed $600 at the time.

Citron testified that he did not believe that the county’s fund was “in serious trouble until the very, very end. I always believed that the fund . . . would never have a principal loss, because we would never have to sell securities until they matured.”

He also suggested that the county’s bankruptcy filing was “premature.” Noting that Wall Street firms dumped $11 billion in collateral after the bankruptcy and his resignation, Citron said: “I believe if I was still there at that time that dealers would not have sold the securities.”

Citron--certain that interest rates would stay low and that the county’s investment pool would prosper--said Merrill Lynch officials impressed him with graphs and charts “that were easily understandable to someone like myself.”

That notion drew a sharp response from Sen. Rob Hurtt (R-Garden Grove), who suggested that even the most casual observer of the economy understood that interest rates were likely to rise in 1994.

“Everybody knew . . . that interest rates were artificially low,” that they would rise and that “it was only a question of when,” Hurtt said.

Later, a member of a private-sector panel that is aiding the Senate committee also challenged Citron’s perception of interest rates.

“You were in the business for more than 20 years. I find it difficult to believe that you didn’t know that interest rates go up and they go down,” said James Pugash, president of Hearthstone Advisors, a San Fernando Valley consulting firm. “Isn’t the real problem that people didn’t want to face the truth that Orange County was hooked on money from the pool?”

Citron replied: “There could be a degree of validity in that statement, yes.”

Sen. John Lewis (R-Orange) and others pressed Citron about why he would make investment decisions based on criteria other than the safety of the taxpayers’ dollars.

“There is great pressure put on me and others to maximize our returns for budgetary reasons, and that is how the situation grew that required me to try to maximize the returns,” Citron said.

Citron said he had no documents demonstrating what sort of pressure he was under, suggesting instead that it was communicated to him verbally. He recalled that County Administrative Officer Ernie Schneider asked him to come up with money to fund a gang suppression program, adding that similar pleas had been made several times.

The longtime treasurer, who resigned last month, testified that counties should not borrow money to invest--as he did in hopes of multiplying the returns of the Orange County portfolio--and should use derivatives only to reduce risk, not for speculation.

Sen. Dan Boatwright (D-Concord) peppered Citron with questions regarding his purchase of securities with ratings lower than A, which is prohibited by state law. Citron could only say that he sold the securities when informed of the law.

Sen. Tom Hayden (D-Santa Monica) questioned why disclosure statements for two investment deals put together by the county within three months of one another in 1994 revealed such different levels of risk. The first intimated certain problems with the county’s financial situation, while the second was “downright upbeat,” Hayden said, adding that he felt there was “a glossing over of the risk.”

Citron responded that the county “relied on professionals” in investment banking to put the prospectuses together. “I did not choose these professionals,” he said.

Asked what checks and balances are needed to head off a similar debacle, Citron--who had squelched an effort to set up a panel to oversee his investments--suggested establishment of a small group of advisers “qualified by training and education” to oversee investment pools.

Some checks already are in place, he added, noting that the Orange County portfolio had been reviewed in the spring of 1994 by the Securities and Exchange Commission. Based on that checkup, Citron said he concluded that problems would not materialize in the pool.

Citron, who received more than $14,000 in campaign contributions from Wall Street last year, said he believed that brokerages should not be allowed to donate money to any political campaign.

Asked if the bankruptcy resulted in part from the “conflict of interest” that existed because Merrill Lynch earned more as it did more transactions with the county, Citron replied that “in retrospect, it appears that way.”

Raabe’s testimony seemed in conflict with much of what Citron said. For instance, the assistant treasurer described his former boss as an experienced, savvy money manager and said Citron chose the underwriters and bond counsels for short-term debt issuances--though Citron had said the Board of Supervisors and the county administrative office made those selections.

“Mr. Citron had been in office for 20 years. . . . He was a very experienced treasurer, and I presumed he knew what he was supposed to do,” Raabe said. “I understood him to be an investment manager who had an extraordinary national reputation.”

Raabe testified that the structure of county government hampered the county’s ability to deal with the crisis during the days before the bankruptcy filing. He said, too, that the county’s losses would have been far smaller if the filing had been averted.

“There was a very strong, concerted effort on (the part of) a number of people to avoid this problem,” Raabe said.

Raabe told the committee he grew concerned about the portfolio in September, but later in the afternoon Mountain View Financial Director Robert Locke told the panel that Raabe visited his city Oct. 15 to assure him about the security of the pool. “He gave assurances that the pool was in good shape,” Locke said.

Hurtt noted the discrepancy in the two witnesses’ testimony, saying, “It looks like we have a little chronology problem.”

Even Jeff Leifer, president of Leifer Capital, who said he has earned about $1 million from the county working as a consultant for borrowing and negotiating interest rates, sought to distance himself from Citron on Tuesday. He steadfastly denied he was a financial adviser to the county.

His relationship with Citron has come under scrutiny because much of the work he did for the county was never put out to bid and he was a contributor to the campaigns of Citron and other politicians.

Senator Quentin L. Kopp (I-San Francisco) pressed Leifer about those contributions to Citron and other politicians. Leifer said all his contribution were legal, but said he could not remember how much or to whom he had contributed. Kopp grew irritated.

“You’re a very defensive young man on this subject,” Kopp said.

After the hearing, Kopp had harsh words for nearly every witness, calling them “a sorry group of human beings--all under the rubric of greed. Almost immorality.”

Kopp called Citron “disgusting,” saying the former treasurer put on an act for the hearing.

“He’s not the kind of person he presented himself as today--this quiet, unsophisticated person,” Kopp said. “He was an arrogant fellow who intimidated these supervisors. He was lauded. He was sought after. And they abrogated their responsibilities.”

Kopp said that Stamenson “ought to be taken off the streets. That man is dangerous. He rapes San Jose and then he rapes Orange County.”

“There’s many people who slipped up,” said Sen. Lucy L. Killea (I-San Diego). “It’s like a circle. Everybody is pointing fingers at everybody else. There’s no end.”

She said she found it very telling that both Citron and Stamenson tried to avoid answering some of the more pointed questions from the senators.

“It was very difficult to get some answers,” she said.

Killea said the portrayal of Citron “as an ignorant county bumpkin . . . will be hard to defend somewhere down the line.” On the other hand, she said Stamenson “used the corporate cloak when he needed it.”

Late in the day, state senators peppered county Supervisors Gaddi H. Vasquez and Roger R. Stanton with unusual aggressiveness about the Board of Supervisors’ role in the collapse of the fund.

The panel members contended that the supervisors had the ultimate responsibility for oversight of the treasurer’s office, did not heed warnings about the risks of the fund and shirked their legislative responsibility to protect taxpayer money.

Vasquez and Stanton said they were led astray because they relied on the advice of county staff and financial experts who indicated that the investment pool was in good health.

“We received glowing written and verbal reports about the investment pool’s performance, and our continued high bond ratings gave us a sense of assurance that our actions were on solid ground,” Vasquez said.

But when Kopp questioned Vasquez about a 1991 auditor’s report critical of the treasurer’s office and a letter from accountant John Moorlach predicting the fund’s collapse--documents which had notations indicating that they were sent to board offices--the supervisor said he had never seen them.

Sen. Patrick Johnston (D-Stockton) asked Vasquez why the county did not more closely monitor its finances, noting that even a controversial issue of $600 million in taxable notes in July was approved without debate.

When Vasquez said he could not recall details of the transaction, Johnston replied: “Want to listen to the tape?”

“Excuse me?” Vasquez responded.

“You want to listen to the tape of the meeting?” Johnston repeated.

With that he pulled up a tape recorder and played a one-minute segment showing that the item was passed on the supervisors’ consent calendar with no discussion.

Johnston hit the stop button and said: “Well, that took care of ($600) million.”

Times staff writers Matt Lait in Sacramento and Michael A. Hiltzik and Debora Vrana in Orange County contributed to this report.

* LAYOFFS HALTED: Judge temporarily bans layoffs of government workers. A15