O.C. ‘Meltdown’ Topped Menu for Secret Dinner : Crisis: Select group of county officials met Dec. 3 to plot strategy--without supervisors. It was to be a pivotal event.

It was Saturday night at the Prego ristorante , three days before Orange County declared bankruptcy. Valets rushed to park Mercedes convertibles and Jaguars in the packed lot. Inside, vaulted ceilings amplified the chatter and clinking tableware.

Secluded in a private room behind the bar, an elite group of high-ranking county employees and two private attorneys nervously sipped glasses of Merlot and nibbled on exotic pastas. Orange County’s ostensible leaders--the five elected supervisors--were not invited; places were reserved for what one guest described as the county’s “policy-makers, decision-makers.”

Busboys and waiters were banned; dinner orders were scribbled on a scrap of paper and passed out through the barely open glass door. Between bites, the attorneys huddled in corners, talking by cellular phone to consultants and government officials in New York and Washington.

“There was a pall hanging over the room,” recalled waiter Stephan Brown, who was not even allowed to describe the daily specials to the dinner guests. “I thought it was a Mafia meeting.”

More than two months later, the three-hour Prego dinner has emerged as a pivotal moment in the county’s seemingly endless financial crisis. The only elected official in the group is threatened with recall. Three of the seven staff members in attendance have been removed from their jobs, and two others join them as potential targets of ongoing criminal investigations.

Even the dinner itself is suspect. In the district attorney’s wide-ranging probe, the event is being examined as part of a larger criminal conspiracy.

The Dec. 3 gathering stands as a telling symbol of how county government has been run. With the county teetering on the brink of disaster, the elected supervisors--who many now criticize for their lack of oversight--remained out of the loop, not even aware of the meeting.

But it was there that seven top staffers, summoned with few hours notice by the county’s bond attorneys, learned the true extent of the imminent disaster, and struggled for a plan to contain the damage.

Over dinner at the Italian bistro, the staffers were told that the $7.4-billion investment portfolio was hemorrhaging and had to be liquidated immediately. They heard for the first time that funds may have been improperly skimmed into a county fund from the accounts of other investors.

Some of the staffers whispered about fraud and potential criminal charges. And some began plotting the ouster of elected Treasurer-Tax Collector Robert L. Citron, who was pushed to resign the next day, before county supervisors were even consulted.

“Up until that night, people believed that the investment fund could be saved,” remembered one dinner guest. “But at the end, everyone knew that we were headed toward meltdown.”

Because of litigation and criminal investigations facing the county and its employees, those who spoke about the dinner--the details of which have never before been reported--did so only on the condition that they not be quoted by name.

Bunched around one end of the 20-seat table were Ernie Schneider, the county’s smooth-talking top administrator; his gregarious aide and confidante Lynne K. Fishel; Matthew Raabe, the earnest assistant county treasurer; cynical finance director Eileen T. Walsh; Auditor-Controller Steve E. Lewis, a lifelong county employee; Terry C. Andrus, the county’s counsel and consummate insider; and John Abbott, Andrus’ deputy and a last-minute dinner addition.

Their hosts were two Los Angeles-based partners from the New York law firm LeBoeuf, Lamb, Greene & MacRae. Jean M. Costanza, who organized the dinner, had advised the county on bond issues for a dozen years. But John W. Cotton, a litigator specializing in defending against charges lodged by the U. S. Securities and Exchange Commission, was an ominous newcomer.

Costanza, an outsider with a limited $45,000 county contract, was the unlikely leader in the early days of the crisis. But it was she who perhaps knew best the portfolio’s problems. With the consent of top county staffers, in early November she had hired Capital Market Risk Advisers, a New York financial firm, to analyze the investment fund.

She was the first to hear of the fund’s impending collapse, and she gave the word to the dinner guests that Saturday.

The supervisors were the last to know.

“That’s the style of this whole county. We call (top staffers) the ‘good-news bears,’ because they only come to us bearing good news,” said David Kiff, who worked for then-Board Chairman Thomas F. Riley before the bankruptcy (Riley left office Dec. 31) and is now Supervisor Marian Bergeson’s executive assistant.

“The goal of county staff up until that day (of the bankruptcy filing) was get the controversy out of the way before it reached the supervisors,” Kiff said. “The board hears, ‘Here’s what we negotiated, now take the action.’ ”

Indeed, the top staffers struggled with the snowballing troubles of the fund for more than a month before handing the problem over to the supervisors.

Raabe first approached Lewis with concerns about Citron’s investments Oct. 24. The two men promptly consulted Schneider and Andrus, then pressured Citron to allow Capital Market to evaluate the fund.

The staffers finally flagged the supervisors Nov. 10--2 1/2 weeks after Raabe’s initial warning. But in individual briefings that day, the supervisors heard only that the pool had a “liquidity problem.” Some were told that Capital Market would present a report to the board Dec. 15.

“They said there was some concern with the status of the investment portfolio and that steps were being taken,” recalled Supervisor Gaddi H. Vasquez, now the board’s chairman.

“They never said what would happen if we didn’t solve it,” noted one supervisor’s aide. “It was as if there was a brush fire, and they said, ‘There are some embers and we’re going to stamp them out.’ ”

Most of the supervisors heard nothing more of the financial problems until Nov. 30, the day before the treasurer’s office revealed its shocking losses to the world. Even then, it was largely Costanza and the public-relations specialist she had hired who penned the press release.

The next day, a Friday, the Hall of Administration was officially closed. As headlines trumpeted Orange County’s fiscal debacle nationwide, most of the fifth floor, where the supervisors have their offices, remained dark.

But on Saturday, while SEC investigators were poring through documents at the treasurer’s office, Costanza sounded an alarm to the staff.

Word of the fund’s troubles were causing jitters on Wall Street. If brokers and lenders got too skittish, they’d flee the fund like rats from a sinking ship--and the once-vaunted portfolio would go under.

Costanza began making calls: Andrus was at his Balboa home; Walsh in her car running weekend errands; Schneider in his office. They agreed to meet that night for dinner.

Bob Austin, the county attorney who handled bond issues, had gone golfing in Pebble Beach, so Andrus tapped Abbott to fill in. Citron, who had controlled the fund for two decades, was not invited.

Fishel was charged with finding a meeting place. The Four Seasons in Newport Beach was booked. Prego, tucked between glass office towers in Irvine and John Wayne Airport, had a small room free. The room, called La Panetteria, is off the kitchen and doubles as the bakery during the day. A glass wall separates it from the restaurant.

From the moment county staffers arrived at the popular eatery around 6 p.m., the mood was somber.

Outside near the valet parking, Costanza, Schneider, Andrus and Cotton briefly huddled in pairs to discuss the urgency of the situation while the others waited at the bar.

The LeBoeuf lawyers were in jeans. Auditor Lewis was the only one in business dress, with a festive holiday pattern on his tie. “I guess this is the county’s Christmas party this year,” he joked.

Inside La Panetteria, Costanza had a cellular phone at her ear, relaying tidbits of bad news from advisers in New York. The portfolio was losing millions every day, and could be worth nothing within a week. Capital Market had a potential buyer, though the price might be low. Still, better sell now.

Around the long marble table, one person leaned close to the next, nervously whispering Costanza’s message: “Liquidate. Liquidate.”

But stunned staffers refused to decide the county’s fate over the phone. Capital Market consultant Tanya Styblo Beder agreed to fly across the country the next morning. Eventually, skittish staff and supervisors would choose not to sell, opting instead for the unprecedented bankruptcy filing.

Cotton, a former SEC attorney brought in last April when Citron was questioned by the SEC, huddled in the corner near the huge metal baking racks, dialing federal authorities. The county staff was hoping the agency would intervene, take over the ailing fund or at least block banks from selling the collateral they held while the county liquidated. There was also talk of SEC subpoenas for Citron and Raabe.

Some seemed unsure how to speak the complicated financial language dominating the discussion. “It was like the first day of organic chemistry,” said one guest.

Andrus, Costanza and Cotton hurled questions at a visibly distraught Raabe, who suggested that the county might have to take a $2- billion hit. At times, the assistant treasurer appeared baffled and apologized.

“I just don’t know,” he said. “Bob (Citron) would know.”

As the conversation grew more grave, the door was closed, the busboy and waiter banished. Fishel jotted down dinner orders: Lamb chops. Rigatoni. Catch of the day.

By the time the food came, most had lost their appetites. No one ordered dessert. The tab was $264.55; Costanza paid, then later billed each guest.

“I got the distinct impression to stay away, so I did,” waiter Brown recalled. “I just got the sense that what they were talking about was illegal.”

At the time, so did many at the table.

When the talk turned to the county’s cash needs, Raabe dropped a bombshell: The money in the county’s Economic Uncertainty Fund was not all theirs. Some belonged to the other 186 investors in the county pool. Questions flew.

Andrus, the county’s attorney, stopped Raabe, but at this point dinner guests have different recollections of what was said next.

Some say Andrus, acting as Raabe’s attorney, suggested he say no more. Others suggest that Andrus told Raabe to keep quiet because, as the county’s attorney, Andrus would be obliged to use Raabe’s words against him if something illegal had occurred.

But the questions continued, and it grew clearer that money had been improperly taken from other participants in the investment pool. Eventually, Raabe said he had better shut up, since he had no attorney present. Lewis, however, urged him to spell out what he knew regardless of the lawyers.

Seven weeks after the dinner, Raabe would be removed from his job when outside accountants discovered that at least $70 million in interest belonging to other investors was diverted to the county via the Economic Uncertainty Fund. Lewis, too, has come under scrutiny over the transfers, for which his office handled the paperwork.

At one point, the dinner discussion focused on the missing guest--Citron, the one person who could fill in the blanks. But Citron was no longer the confident captain steering the fund. His ill-starred bet on interest rates had gone bust.

Talking about his boss, Raabe unleashed another shocker: Citron consulted a psychic and mail-order astrologer at work. Now it was Costanza’s turn to advise Raabe to watch his words.

Those at the dinner had no idea whether Citron had really consulted the stars; it no longer mattered.

The next morning, Schneider and Andrus drafted a two-paragraph letter of resignation for Citron’s signature. Costanza stepped in to change the wording, giving Schneider discretion over when it would become effective.

They used a piece of Citron’s own stationery. Oddly, it was dated Dec. 4, 1995 .

Without notifying the supervisors of their mission, a posse of Costanza, Schneider, Andrus, Raabe and Lewis squeezed into Costanza’s Jeep and headed for CANCEL PROMPT)Citron’s Santa Ana home about noon.

Once inside the house, Schneider and Andrus did most of the talking. The five visitors perched uncomfortably in the living room while the 69-year-old Citron, a man they once considered a financial genius, sat befuddled in a rocking chair.

They acknowledged that because Citron held an elected post, the final decision was up to him. But, they said, the supervisors wanted him to go. Resigning would be the most graceful way out.

Rocking as his longtime colleagues waited expectantly, Citron asked: “Is it really that bad?”

Shaken, he agreed to sign, seeming not to hear the group’s offer of mental health counseling. The deed was done within half an hour. Fishel and Walsh were summoned to comfort Citron; a county psychologist was dispatched later on. The man who shepherded the county’s finances for more than two decades began to cry.

The posse returned to the Hall to finally inform the supervisors--their bosses--of the devastating extent of the county’s problems. Because they could not meet as a group without violating the state’s Brown Act requiring that local government meetings be open, the supervisors were briefed individually, starting at 1 p.m. It was the first they heard of Citron’s resignation.

“What struck me was, ‘Who told (Schneider) to do that? What the hell did he do that for?’ ” Supervisor Roger R. Stanton recalled. “He doesn’t have the authority to do that. I was annoyed.”

“I would presume that staff was frantically trying to come up with a way out before they came to the Board of Supervisors,” Supervisor William G. Steiner said. “The only thing worse than bad news is no news.”

That Sunday, the supervisors got bad news--but not all the news.

As the staff circulated from office to office, the supervisors learned that the entire investment pool was teetering on the verge of collapse, and that the longtime treasurer had stepped down. But it would be weeks before the supervisors learned of potential fraud in the Economic Uncertainty Fund. They said they never heard talk of astrologers or psychics.

As late as last week, most of the county’s top elected leaders did not even know there had been a dinner at Prego.

Times staff writers Mark Platte and Dan Weikel contributed to this story.

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Tough Dinner to Digest

On Saturday, Dec. 3--two days after the county announced that its highly touted investment portfolio had suffered a stunning $1.5-billion loss--seven key government staffers and two outside lawyers gathered at a swank Irvine bistro to discuss the situation and hash out possible solutions. The three-hour dinner has emerged as a pivotal moment in the county’s continuing financial crisis.

The Menu: Fish for some; pasta for others. Two bottles of red wine. No dessert. Orders were scribbled on scraps of paper and handed out so waiters would not intrude.

The Tab: $264.55. Lawyer Jean Costanza paid; the others later reimbursed her $30 apiece.

The Guests

Ernie Schneider: Then top county administrator, later demoted from his $140,000 post for mishandling the financial crisis. Led posse of five to collect Treasurer-Tax Collector Robert L. Citron’s resignation the next day.

Terry C. Andrus: Top county attorney, drafted the resignation letter presented to Citron. Learned at the dinner of potential fraud in the Economic Uncertainty Fund.

Steven E. Lewis: Auditor-controller. Once a hero for criticizing Citron, now under scrutiny for knowledge of improper transfers among funds, including those discussed at the dinner.

Matthew Raabe: Former assistant treasurer; suspended when outside auditors found millions in pool interest improperly diverted to county accounts, which he hinted at during dinner.

Eileen T. Walsh: County finance director; also placed on paid administrative leave after interest-diversion discovery. Called in to comfort Citron after resignation was secured.

Lynne K. Fishel: Schneider’s assistant; made arrangements for the dinner, coordinated writing of orders and accompanied Walsh to Citron’s home the next day.

Jean M. Costanza: County’s outside bond counsel; orchestrated dinner to alert county staff to worsening crisis, then joined posse presenting Citron with resignation letter.

John W. Cotton: Another attorney in Costanza’s firm, LeBoeuf, Lamb, Greene & MacRae; specializes in cases involving Securities and Exchange Commission rules.

John Abbott: Attorney in county counsel’s office. Received a last-minute invitation because his colleague, Bob Austin, was golfing in Pebble Beach for the weekend.

Source: Times reports