Testimony May Open Citron to Legal Charges, Expert Say

When local agencies invested billions of dollars in the high-flying investment pool run by then-Treasurer-Tax Collector Robert L. Citron, they were assured that a safety net was in place to catch them if the value of the highly leveraged fund plummeted.

But in testimony before a special state Senate committee Tuesday, Citron revealed that he never had a backup plan--an admission that may leave him open to charges that he breached his fiduciary responsibilities and violated securities laws, attorneys and experts said.

In letters and conversations over the past few years, the treasurer’s office encouraged school districts, cities and other governmental agencies to continue investing in the fund. In an April, 1994, letter to one agency, Assistant Treasurer Matthew R. Raabe said he had “several strategies” to combat unfavorable interest rate shifts that would reduce the fund’s worth.

Now some of the 186 agencies that had a total of $5 billion in the pool complain that they were misled about the health of a fund that ended up collapsing under the weight of huge borrowings wagered on a bad bet that interest rates would stay low.

“There’s a big issue here,” said Sam Gruenbaum, a Los Angeles securities attorney. “If I’m the treasurer and I’m sending out letters that aren’t true, then I’m inducing you to invest money by misleading you.”

Neil Millard, a Los Angeles attorney, said: “If an investment in the fund is deemed to be an investment in a security, then statements that he had a contingency plan when he did not could be considered a material fact.”

Citron’s attorney, David Wiechert, said the former treasurer’s overall investment strategy--holding securities to maturity--was designed to serve as a safeguard against rising interest rates.

“The safety net was always that there was going to be enough capital to cover any blips on the interest radar screen. That was his plan,” Wiechert said Wednesday. “The fact that a contingency plan . . . doesn’t work doesn’t mean you don’t have one. To suggest that he has no plan whatsoever or no concept what to do is not the case.”

Securities and Exchange Commission regulators--who are investigating county officials and securities brokers for possible fraud and violations of securities laws--would not comment on Citron’s testimony.

Officials at local agencies with investments in the fund said they were told in letters and conversations not to worry.

“As much time as he has been managing money, he’s been through all sorts of cycles in the economy,” said Gary Streed, director of finance for the Orange County Sanitation District. “I just can’t believe that he wasn’t prepared for an increase in interest rates. But it sure looks like he wasn’t.”

County Auditor-Controller Steven E. Lewis said Citron’s testimony Tuesday contradicted what he the former treasurer repeaatedly told county officials and indicated in written reports.

“Apparently he did not hedge his investment pool fully. That’s not what his report says,” Lewis said. “They definitely told us things like they were increasing their cash flow, maintaining large liquidity and that they were unleveraging. We thought that they had a plan for maintaining their liquidity, and they were telling us that.”

Citron and Raabe said last spring that interest rates would inch up for a short period of time and then level off. They told investors they had a contingency or “exit” plan, but were unwilling to offer share details.

Later in the year, In a separate interview, Citron again told investors and county officials said that adequate safeguards were built into the county’s investment strategy for protection of the pool’s clients. One of those backup plans included a $1.5-billion cash account to cover local agencies’ investments should they wish to leave the fund, Citron said last spring.

But in April, when a concerned Peter J. Oeth, general manager for the Tri-Cities Municipal Water District in San Clemente, wrote to Citron for details about the fund, he received a reply with similarly vague assurances.

“If rates continued to rise even further, we may need to liquidate some securities. However, we do have several strategies in mind that would counter such an occurrence,” Raabe wrote to Oeth on April 28.

That The treasurer’s strategy relied on a “number of factors,” Raabe said, but never detailed what the actual strategy was. The letter alarmed Oeth enough that he began withdrawing the district’s money from the county pool.

On Tuesday, Citron said he never developed a blueprint for what to do if things went wrong because he never thought the fund could crash.

“I never believed the fund could lose principal,” Citron told state legislators.