Books May Have Been Falsified : Latest Stunner: O.C. Officials Say $85 Million Diverted : Bankruptcy: Treasurer’s office funds meant to be allocated to pool participants were instead kept in an account managed by Citron. Two sets of books were kept.

In another fiscal jolt, Orange County officials revealed Saturday that the county treasurer’s office apparently falsified records and diverted about $85 million into two special accounts, shortchanging scores of cities, school boards and special districts of interest payments.

Board of Supervisors Chairman Gaddi H. Vasquez said it is a mystery why the money was diverted and that all records were being turned over to the district attorney and the U.S. Securities and Exchange Commission, both of which are investigating the county’s financial collapse.

“We haven’t looked at what laws have been broken, but it appears that government records were falsified,” said Jim Mercer, an attorney working for the county.

“All we know is that money that normally would have been allocated to pool participants was instead kept in an account at the treasurer’s office,” Mercer said. “Nobody at this point has told us why that was done.”

Matthew R. Raabe, assistant county treasurer, was placed on administrative leave Friday after refusing through his attorney to answer questions about the improper accounting, Vasquez said. Other employees both within and outside the treasurer’s office may also face disciplinary action, officials said.

The diversion was discovered after an audit by the accounting firm Arthur Andersen & Co. County officials and their financial advisers said Saturday they had found no evidence of embezzlement or that the $85 million diverted from investors since August, 1993, was intended to help with the county’s worsening cash-flow crisis. Accountants said they are still searching to see whether as much as $15 million more may have been diverted.

The money is owed to the 187 public agencies that invested in the county pool managed by then-Treasurer-Tax Collector Robert L. Citron, who resigned two days before the county filed for bankruptcy Dec. 6.

None of the improperly allocated interest has been spent, officials said, and clear records now exist that will enable the money to be returned to investors. Pool participants will likely be credited with 1% to 2% more interest than they were given for the past 18 months.

“We will be able to correct the records,” said Bruce Bennett, the county’s bankruptcy attorney. “To date it appears that the money is still in the pool. The records seem to show that the money was misallocated . . . and remains there.”

Neither Citron, Raabe nor their attorneys could be reached for comment Saturday.

Two county officials who have reviewed the audit said Saturday night that the evidence of impropriety was undisputed. They said the treasurer’s office kept two sets of books, one of which showed the actual amount of interest earned and the other showing the amount credited to investing agencies.

“The path to this was so clear it was stupid,” one of the officials said.

During the audit, accountants from Arthur Andersen & Co. were tipped off when they found that the county’s “economic uncertainty” fund earned a higher rate of return than other participants in the now-failed investment pool. They also found another fund, known only as “9JJ,” that was opened in July, 1994, and appears to have also earned higher yields than the rest of the pool.

All investors in the county’s pool are supposed to earn the same amount of interest on their money, officials said. But officials said the discovery of two small funds earning more indicates that pool participants were were shortchanged of some interest, which instead was funneled into the two county-held funds.

“More interest income was allocated to that particular fund in the pool than other funds,” said Paul Sachs, chief of the Arthur Andersen team working for the county. “It got a disproportionately higher rate of return.”

Sachs said the accountants found evidence of the problem Friday afternoon and worked past midnight confirming the improper allocations. The supervisors were alerted during a closed-door session Friday afternoon and met again for two hours in secret Saturday morning before the 2 p.m. announcement.

Supervisors had set up the economic uncertainty fund two years ago at the request of county Chief Administrative Officer Ernie Schneider and former budget director Ron Rubino at a time when the county’s investments earned more interest through Citron’s pool than had been anticipated in the budget. Money in the fund has recently been used for public libraries, fire services and the county general fund, documents show.

Sources said that Schneider, who has come under increasing attack by top county leaders since the financial crisis began, was excluded from the closed-door sessions on the diverted funds.

Schneider and Rubino said Saturday that they initiated the economic uncertainty fund and administered its proceeds, but did not keep track of how much went into it, or how it got there.

“That was the treasurer’s responsibility. Citron was responsible for keeping the accounts straight,” Schneider said. Regarding Saturday’s announcement about the diverted interest money, he said: “It was news to me. I was as surprised as anyone else.”

Rubino said news of the interest diversion was “a real shocker.”

The second fund--the 9JJ account--is set up in the format of a pool participant’s account, but no pool participant was designated for it, Mercer said. Accountants are trying to determine how the fund was used.

Though accountants only found documentation of the interest diversion Friday, sources said the county first heard that local agencies’ money was part of the economic uncertainty fund shortly after the county filed for bankruptcy protection Dec. 6.

As officials were searching for excess money to help with the crisis, Raabe had told county administrators that the fund could not be fully tapped because it contained other people’s money, the sources said. Raabe never elaborated, they said.

County officials said they alerted attorneys representing the investment agencies about the diverted interest Saturday morning.

The news shocked pool participants who already are battling with the county to get their money back.

“It’s sad. If we can’t keep an accounting of where the monies are, that’s a pretty poor reflection,” said Irvine City Manager Paul O. Brady Jr., who represents cities on the county’s bankruptcy pool participants committee.

“It just amazes me that those types of things occur with those amounts of money in that operation. I don’t know what else I can say about it. I guess nothing surprises me any more.”

Gary Streed, director of finance for the Orange County Sanitation District, said he found it “astonishing” that the pool may have earned enough interest that participants could be paid such high yields, with 1% to 2% more apparently funneled into a separate fund.

“There may have been even more risk than we realized to earn that much,” said Streed, whose agency had $450 million in the pool at the time of its collapse.

“It’s upsetting to think that people that you had a lot of faith in could make mistakes like that, if that’s what it was,” Streed said. “We just want (the financial crisis) to get fixed and go away, and it just seems like it’s getting worse.”

For county leaders, the news was another shocking reminder that the county has a long way to go before digging out of bankruptcy.

“It is another problem. Nobody that I know of had any inkling that something of this nature would turn up,” said Supervisor Roger R. Stanton. “God forbid that there’s anything else like this in the wind.”

Stanton said the board “didn’t waste a minute’s time” before reporting the discovery to local and federal law enforcement officials.

But Stanton declined to speculate on the severity of the wrongdoing.

“We are taking this one step at a time,” he said. “The step that we took was the most obvious step you can take, to turn it over to the district attorney and the SEC. I have to rely on the judgments of the district attorney. I can’t make conclusions about what the district attorney has yet to investigate.”

County Supervisor William G. Steiner was more blunt.

“To say this is disturbing news is an understatement,” Steiner said. “There’s been lots of debate about the lack of checks and balances, but even if they were there, there’s no way to guard against fraud.”

Times staff writers Rebecca Trounson and Matt Lait contributed to this report.