Citron Shifted Losses to Pool of Agencies’ Funds : Orange County: Officials suspend entire treasurer’s office staff pending investigation of $140-million transfer.

In yet another shocking disclosure of apparent irregularities in Orange County’s collapsed investment pool, officials announced Friday that former Treasurer Robert L. Citron’s office shifted at least $140 million in county losses into pool accounts held largely by other public agencies.

The discovery--which prompted acting Treasurer Thomas E. Daxon to suspend his office’s entire staff as they arrived for work Friday--involved a series of transactions last fall in which the treasurer’s office transferred risky securities from a highly leveraged county fund into an investment account shared by more than 130 other government agencies.

Although the transferred securities were losing value, the treasurer’s office credited the county with their “book” or purchase value instead of their market value. The effect was to spread the loss among all pool participants when the securities were sold, rather than limiting it to the county.

David Wiechert, Citron’s attorney, said Friday that his client did nothing wrong.

“In evaluating these transactions, it should be kept in mind that Bob’s philosophy was always to hold securities to maturity,” when they could be redeemed for their face value, Wiechert said. “So at the time that they were transferred, there was no loss. There was no loss based on book value.”

But Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, the nation’s top regulator of municipal securities, said the transactions indicate that Citron knew for months about the gravity of the problems facing the investment pool he managed.

If so, the transactions could deepen the doubt about whether appropriate disclosures were made to investors about the financial condition of the county’s investment pool.

“He had to know what was going on, just had to. There’s just no way around it. He had to be running a dual set of books,” Taylor said. “That’s just pure chicanery.”

Friday’s disclosures came to light less than a week after outside accountants uncovered evidence suggesting that interest due other pool investors was skimmed into a county account.

“To put it in perspective, this issue is considerably more serious than the accounting misallocation problem that was disclosed last weekend,” said Bruce Bennett, the county’s chief bankruptcy attorney.

Lawyers and securities experts said the two sets of transactions could pose serious legal problems for Citron, who resigned two days before the county declared bankruptcy, and for his top assistant, Matthew R. Raabe, who was suspended last week when he refused to answer questions about the interest transfer. The two men are subjects of several criminal investigations into the county’s financial collapse.

At a minimum, the disclosures heightened skepticism among officials of the 186 cities, school districts and other government agencies that invested taxpayer money in the county pool.

In court, pool participants plan to argue that they placed their money in trust funds within the county treasury. Although attorneys for the county dispute that position, Taylor said the discovery of improper transfers could help show that Citron violated whatever trust terms may have been in place.

“Clearly this sort of behavior would violate fiduciary responsibilities,” Taylor said. “This may well make the county responsible for the whole damn loss, all the money. You have somebody who’s clearly violating their duty. It’s a real problem.”

Although the investment fund’s overall $1.69-billion loss will not change, county government will suffer as much as a 5% greater share of the loss when the funds are reallocated. Other participants in the pool will have their losses reduced by up to 3%, officials said.

County officials cautioned, however, that they have not yet finished their review of the fund transfers and that the county’s share of the loss could grow larger still. So far, the accounting firm of Arthur Andersen & Co., which uncovered the irregularities, has reviewed about 40 of the estimated 60 allegedly improper transfers made from September to November.

“The way things are going, maybe the other pool participants won’t have to litigate to get their money back,” Supervisor William G. Steiner said.

Investors in the pool, although pleased they would be receiving extra money, were nonetheless furious over the latest news.

“My chair is still rattling, “ said Peer Swan, president of the Irvine Ranch Water District, which removed money from the fund this fall after Swan became concerned over Citron’s investments. “It sounds like we got some more money, which is good for us. But it’s a terrible situation.”

The latest disclosure “shows that the county’s books are not to be trusted,” said Jeffrey Chanin, a financial adviser to the Bankruptcy Court creditors committee that represents the county’s vendors and bondholders. “The county supervisors didn’t know what was going on,” and yet “a lot of people around them are still around.”

Because the problems in the treasurer’s office were deemed so serious, Daxon placed his entire staff of 17 on paid leave until it can be determined who knew what about the transactions.

Employees were called to work about 7 a.m. Friday and sequestered in a conference room, where sheriff’s deputies gave them plates of pastries and coffee.

“We all felt like it was the Last Supper,” one employee said. “We’ve been through so much in the past two months. They’ve just gotten rid of everyone down to the last file clerk and secretary.”

The worker, who asked to remain anonymous, said the employees were told to remove personal belongings from their desks and were not given any indication when they might be allowed to return to work. Many of the workers, already exhausted from weeks of uncertainty and upheaval and the loss of two bosses in two months, burst into tears.

“It’s like a bad dream. We don’t know what’s going on or how long this is for. They won’t tell us anything. We find out things in the newspaper that they don’t even tell us,” the worker said.

Some employees were asked to remain for most of the morning to train replacement workers--some of them former county employees, others from Arthur Andersen.

State Treasurer Matthew Fong said Friday that he is prepared to lend whatever assistance is needed in the wake of troubles at the treasurer’s office. He said that senior staff members from his office were en route to Orange County and that he planned to meet with county leaders Friday afternoon, moving up a meeting that had been scheduled for Monday.

In the wake of the county’s bankruptcy, Fong said, he expects to propose a series of legislative measures designed to prevent another Orange County-style collapse.

These include periodic reports from county fund managers that will allow the public--and Wall Street--to monitor the risk of investment pools, and restrictions on the use of so-called reverse repurchase agreements to make sure no more than 20% of any public portfolio consists of such risky investments.

Friday’s disclosure points up the way reverse repurchase agreements can wreak havoc when interest rates rise.

According to attorneys who analyzed the transfers, the treasurer’s office kept a county-controlled account called Fund 100 that at one point contained $170 million. This money was invested separately from a commingled pool that Citron managed on behalf of the county and 186 other investors.

The $170 million was used to borrow 10 to 15 times that sum--funds that were invested in reverse repurchase agreements investments that produced high yields when interest rates were falling but dropped dramatically as rates rose last year.

As the 60 investment deals in Fund 100 began to lose money, they were moved from the separate county account into the commingled pool, thus transferring the loss from the county exclusively to everyone with funds in the pool. On Nov 1, officials found, about $1.7 billion in leveraged investments that were losing money were shifted to the commingled pool.

By the time the pool collapsed and the county filed bankruptcy, Fund 100 was empty.

On Friday, officials estimated that the shifts resulted in losses of at least $140 million. But James W. Mercer, an attorney working with the county, noted that there were 60 separate investments and that accountants have so far tracked only 70% of them. If the remaining 30% suffered similar losses, the overall losses that were shifted would total about $200 million.

The Arthur Andersen auditors have not yet examined records for 1993. But sources said the accountants have found indications that during that year, investments that were reaping profits were shifted from the commingled pool to Fund 100 to increase the county’s earnings at the expense of other pool participants.

Accountants have also discovered shifts from other accounts that were losing money to the commingled pool, Mercer said.

For instance, the securities purchased by four school districts that borrowed a total of $200 million last summer to invest were transferred into the pool. When the school districts first launched the deal in June, 1993, Citron’s office offered them a guarantee protecting their principal, promising that the commingled pool would buy the securities if they began to take a loss.

A similar transfer was made when a segregated investment belonging to Laguna Beach began to lose money.

All such transfers would have to have been approved by the treasurer’s office and the office of Auditor-Controller Steven E. Lewis. Lewis, whose office has been under increasing scrutiny by the Orange County district attorney’s office and from county supervisors, issued an open letter Friday defending his oversight of the county’s finances.

“I believe the auditor-controller’s office did its job and did more than others with oversight responsibility,” Lewis wrote.

But he declined comment on Friday’s disclosures.

Times staff writers Ralph Vartabedian and Michael A. Hiltzik in Los Angeles and Debora Vrana and Chris Woodyard in Orange County contributed to this story.