Despite Testimony, Citron Had Touted a Backup Plan

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 he never had a backup plan--an admission that attorneys and experts say may leave him open to charges he breached his fiduciary responsibilities and violated securities laws.

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

In a letter last April to one agency, for example, Assistant Treasurer Matthew 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.”

Now some of the 186 local agencies, which had a total of $5 billion in the pool, are complaining they were misled.

“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.”

Added Neil Millard, a Los Angeles attorney: “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 revelations. But the conflict between Citron and the local agencies could lie near the heart of the SEC’s probe.

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,” Stan Oftelie, chief executive of the Orange County Transportation Authority, said earlier this month.

County Auditor-Controller Steve E. Lewis said Citron’s testimony Tuesday also contradicts what the then-treasurer repeatedly told county officials and indicated in written reports about the pool.

In a September 10, 1993, report to the Board of Supervisors, Citron wrote that “although we strongly believe that future interest rates will remain low, to insure against the eventuality of materially rising interest rates,” he 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. . . . 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 predicted last April 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.

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

After three hours of testimony Tuesday on topics ranging from where brokers took Citron to lunch to whether he violated state law, Citron told state legislators he had no contingency plan.

The disclosure came after questions from state Sen. Lucy Killea (I-San Diego), the committee’s co-chair, who noted that in his most recent annual report to the Board of Supervisors, Citron had quoted President Harry Truman’s comment about effective leaders needing to be right “only 80% of the time.”

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Killea then asked Citron whether he ever thought about an escape hatch for the 20% of the time he might be wrong. He said no.

“I was so sure of what I was doing, based upon the many years of success,” Citron said. “In retrospect, I find that I was not the sophisticated treasurer I thought I was.”

In other parts of his testimony, Citron said he never did a computer model on what would happen if interest rates rose or investors pulled their money out while interest rates were going up. Citron said he never developed a blueprint of 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.

County treasurers and municipal finance experts across California said they are amazed Citron was operating his risky investment strategy without any precautions.

“You don’t put both feet in the boat before you leave the dock,” said Lee Buffington, former president of the California Assn. of County Treasurers and Tax-Collectors. “You’ve got to have a plan if things go wrong. We’ve certainly had to use ours.”

Steve Juarez, executive director of the California Debt Advisory Commission, a state agency that tracks bond sales, said investors may question why Citron did not have some type of detailed backup plan.

“One of the questions here is whether not knowing there wasn’t a backup plan was a key issue that should have been disclosed to investors in the fund,” Juarez said.

Citron told investors like Peer Swan, chairman of the Irvine Ranch Water District, and repeated in Tuesday’s testimony, that he planned to ride out a period of high interest rates by holding all the securities in the portfolio to maturity, a strategy he had followed for years, racking up high yields.

But Swan pointed out that what Citron needed was a way to increase liquidity in the short term.

“An acceptable strategy is to hold to maturity,” Swan said. “What becomes key in that is what the liquidity on the portfolio is, and if you have sufficient liquidity to provide for withdrawal requests. That’s the plan he didn’t have.”

Swan said Citron and Raabe assured him early in 1994 that the treasurer’s office would adjust the portfolio “when necessary” to hedge against rising interest rates. But when Swan met with Citron last October--after interest rates had been hiked several times--the treasurer said the only alternate plan he had was his belief that rates would soon drop.

Lewis, the county auditor, also said he was repeatedly assured that Citron was taking care of the liquidity and could ride out the interest rate storm.

“To me the plan that he had was that he was going to maintain enough liquidity . . . to hold those investments to maturity,” Lewis said. “His plan wasn’t any good, that’s for sure. If he had one, it wasn’t any good.”