Citron Concedes He Had No Backup Plan if Fund Luck Soured : Hearing: Former O.C. treasurer makes public apology before state panel. He and other key figures in county pool debacle almost all seek to shift blame elsewhere.

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 state Senate 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 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 more than $2 billion last year as Citron’s highly leveraged investments in interest rate sensitive securities 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 Lynch 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 offered conflicting 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 him into risky investments, such as reverse repurchase agreements, Stamenson said he had learned much himself from Citron, adding that “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.

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 while he spoke each morning about 8 a.m. with Citron, he was not the 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. until about 1981. Subsequently he worked for the firms of First Boston and Drexel Burnham Lambert before joining Dean Witter.

Citron said during Tuesday’s hearing that he has known De Spirito since 1974 and had consulted him often. De Spirito declined comment Tuesday on his dealings with Citron.

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

Citron said he did not believe that the 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.

When James Pugash, president of Hearthstone Advisors, a San Fernando Valley consulting firm, asked, “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 R. Lewis (R-Orange) and others pressed Citron about why he would make investment decisions based on criteria other than the safety of taxpayers’ money.

“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.

He said he had no documents showing what sort of pressure was applied, suggesting instead that it came 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 were made “several times.”

Citron, who held the office for 24 years before his resignation 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. 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.

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 SEC. 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 on 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 on bond issues, 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 county supervisors.

Sen. Quentin L. Kopp (I-San Francisco) pressed Leifer about those contributions to Citron and other politicians. Leifer said all his contribution were legal, but couldn’t remember how much or to whom he’s 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.”

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 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, Johnson 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.

He stopped the tape 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.

Bonds Coverage

* THE REAL CITRON--Naive public official tricked by brokers, or shrewd trader who fooled himself? Citron’s contradictions. A18

* NO-FAULT LINES--Somebody made a major mistake, but key figures at Senate hearing try to deflect the responsibility. A19

* MORE STORIES, PHOTOS: A18-22, D6