Supervisors Grill Auditor Over Bankruptcy : Investments: Orange County leaders harshly question official about his knowledge of risky dealings. He says he was forced to rely on misleading information from treasurer’s office.

Orange County Auditor Steven E. Lewis, already under scrutiny for his role in the county’s fiscal calamity, was summoned before the Board of Supervisors on Wednesday and questioned in the harshest terms yet about his knowledge and actions as the crisis developed.

Supervisor Roger R. Stanton led the attack on Lewis during the board’s meeting, seeking to pin the elected auditor down on what he knew of the risky investment practices of ousted Orange County Treasurer Robert L. Citron and what warnings he gave about Citron’s conduct.

Lewis, who has defended himself against increasingly pointed criticism from county leaders in recent days, again denied wrongdoing.

Specifically, he said it was not his role to question transfers into a county account of interest earned by other depositors in the county’s ill-fated investment pool, but rather to ensure that the accounting was done properly.

Lewis said his office was forced to rely on misleading information from the treasurer’s office. “We were never aware of any serious problems,” Lewis told the supervisors.

In other developments Wednesday:

* In Sacramento, state Treasurer Matt Fong released a list of preliminary recommendations for changes in state law in the aftermath of the Orange County crisis. His proposals include a requirement for more complete disclosure of profits and losses suffered by public investment pools and restrictions on leveraging of municipal portfolios--the practice of borrowing against holdings to invest in more securities.

* A major credit rating agency downgraded a $95-million issue of taxable bonds sold by the city of Anaheim last year for the purpose of investing in the county pool. In a report updating the impact of the pool’s losses on bonds issued by the 187 public agencies with investments in the pool, Moody’s Investors Service also warned that other bond ratings could be downgraded in coming weeks.

* U. S. Bankruptcy Judge John E. Ryan approved a county request to pay about $3.7 million due bondholders. But attorneys representing the county’s creditors and bondholders grew increasingly testy in the Bankruptcy Court hearing, pressing the county to explain how it plans to bolster its credit-worthiness over the long haul.

* The finance director for the city of Santa Barbara apparently will become the first public official outside Orange County to lose his job over the financial debacle. Finance Director Mark Paul reached “a mutual understanding” with City Administrator Sandra Lizarraga that Paul should resign because of his decision to sink $37.5 million of the city’s reserves into Orange County’s troubled investment pool, city officials said Wednesday.

In Santa Ana, the public grilling of Lewis came during a question-and-answer session at the Board of Supervisors meeting.

Stanton angrily pressed the auditor to explain how he could approve transfers of money and securities between investor and county accounts at the behest of the treasurer’s office without ever questioning the transactions.

“There wasn’t a need to ask,” responded Lewis, who appeared agitated by the tone of the questioning. “We did not have to ask (how) to do our jobs.”

County officials have disclosed in recent weeks that Citron’s office skimmed at least $85 million in interest due to other investment pool participants into a county account. The office also spread more than $100 million in county losses among other investors by shifting money-losing county investments into commingled accounts, according to outside auditors.

Lewis was appearing before the board to get retroactive approval for a fund transfer he made in late December to enable the county’s Environmental Management Agency to cover bond debt payments.

But Stanton seized on the opportunity to skewer Lewis on his office’s auditing procedures and practices. The exchange quickly escalated, with Stanton charging that Lewis was never concerned about Citron’s practices and had assured the board and the public that there were no problems in the treasurer’s office.

Stanton asked Lewis to explain an April 28 political endorsement letter Citron used in his reelection campaign literature. The letter affirmed Lewis’ “confidence for (Citron’s) long-proven ability to manage the entire treasurer-tax collector’s office.”

Lewis replied that he had sent the letter merely to express his political support for Citron, who was then engaged in a heated election fight with opponent John M. W. Moorlach, a Costa Mesa accountant who warned that Citron’s investment practices were risky.

“I supported Bob in the campaign,” an increasingly uncomfortable Lewis told the supervisor. “I thought things were OK.”

“And if you didn’t think things were OK, you would have told the Board of Supervisors, right?” Stanton asked.

“That is true,” Lewis responded.

“Well, I’m sorry you didn’t tell the Board of Supervisors, Mr. Lewis, and I hope you don’t represent to the people that you did in the future,” Stanton said.

Later in the day, an exhausted Lewis said the supervisor’s attack was unfair. He said his office was more vigilant than most in raising concerns about Citron’s investment practices.

“We never foresaw the bankruptcy,” Lewis said. “Obviously, if we had, we would have told everyone. What we did was raise reasonable concerns about the amount of borrowing the county was doing.”

In fact, shortly after the county filed for bankruptcy, Lewis disclosed that his office’s 1993 audit of Citron’s operations had revealed some financially risky investments. More recently, Lewis made public a June 8 letter he had written to Ernie Schneider, the recently ousted county administrative officer, warning about Citron’s risky investments.

* RELATED STORY: D1