Citron Testimony Conflicts With Assurances of Safety

Former Treasurer-Tax Collector Robert L. Citron’s testimony this week that he never had a strategy to cope with rising interest rates or widespread withdrawals from the county’s investment fund contradicts what he and his deputy told officials and the public over the past 16 months.

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

The treasurer’s office offered some officials assurances that a contingency plan did exist in case market conditions threatened an investment strategy dependent on low interest rates.

In an April, 1994, letter to one agency, Assistant Treasurer Matthew R. Raabe said the treasurer’s office had “several strategies” to combat unfavorable interest rate shifts that would reduce the fund’s worth.

“If rates continued to rise even further, we may need to liquidate some securities,” Raabe wrote to Peter J. Oeth, general manager of the Tri-Cities Municipal Water District on April 28. “However, we do have several strategies in mind that would counter such an occurrence.”

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.

“We thought there was essentially a safety net, and it could only fall so far,” said Stan Oftelie, chief executive of the Orange County Transportation Authority, earlier this month.

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

In a Sept. 10, 1993, report to the Board of Supervisors, Citron said that “although we strongly believe that future interest rates will remain low, to ensure against the eventuality of materially rising interest rates,” Citron was altering his investment strategy.

“This adjustment in investment policy lessens our leverage ratio and diversifies our interest rate risk,” Citron wrote.

But Lewis said Citron did not hedge his investment pool fully, and “that’s not what his report says. 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 said in an interview that they had a contingency or “exit” plan, but were unwilling to offer details.

In a separate interview, Citron said 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.

At about the same time, Oeth wrote to Citron for details about the fund and received a reassuring letter from Raabe.

“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.

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.