County Counsel Andrus Faces Grilling : Inquiry: State senators plan to ask why he didn’t inform O.C. supervisors, bond buyers of fund problems.

As Orange County’s finances snowballed toward collapse last year and secrecy became the chosen strategy, there was one man in whom key officials confided: County Counsel Terry C. Andrus, the county’s top attorney.

He went along last spring as U.S. Securities and Exchange Commission investigators raised questions about the county’s troubled investment pool and he decided to keep the meeting under wraps. He received the frantic early warnings from county staffers last fall of the fund’s meltdown. He drafted former Treasurer Robert L. Citron’s resignation letter in December.

And now, Andrus is one from whom a special state Senate panel in Sacramento is demanding some answers.

“He is a person whom others presumably went to for advice. Where are the red flags?” said Scott Johnson, chief counsel to the special committee on local government investment.

Today, as the legislative autopsy of Orange County’s financial collapse continues, state senators plan to question Andrus about his inside knowledge of the fund’s problems and his failure to alert both the county’s five elected supervisors and potential buyers of county bonds.

“He has been involved pretty much in it,” said Sen. Lucy Killea (I-San Diego), co-chair of the committee probing the crisis. “Certainly he has some responsibility in terms of where they were getting to the edge of breaking the law.”

The role of Andrus--a county employee for two decades--and at least one of his deputies has also become part of the Orange County district attorney’s wide-ranging fraud investigation.

Andrus, one of a dozen people called to testify today, said Wednesday that he planned to tell senators that he acted properly to protect the county’s interests and has done nothing wrong.

At issue is whether Andrus had an obligation to disclose in official statements accompanying $1.3 billion in bond issues last summer that the SEC was asking questions about the investment fund.

Frank C. Razzano, a former assistant U.S. attorney and former assistant chief SEC trial attorney, said an issuer “must disclose anything that is material,” which means anything of substance that a buyer of bonds would want to know.

“Maybe the allegations are all (false), but the grandmother from the Midwest with $5,000 to invest might want to know about this before making her decision to buy bonds,” said Razzano, who now defends clients against SEC charges.

The omission is particularly glaring, say those probing the financial collapse, because the SEC meeting came eight months before the county declared bankruptcy.

In April, SEC attorneys--after requesting more than 20 boxes of documents--questioned both Citron and his now-suspended assistant, Matthew Raabe, for more than three hours about the investment portfolio. Andrus and John W. Cotton, an SEC specialist with the county’s bond counsel firm, Le Boeuf, Lamb, Greene & MacRae, also attended the meeting.

Andrus said Wednesday that he did not feel the need to reveal the SEC inquiry because he “learned nothing. There was no unlawful activity. And I never heard from (the SEC) again.”

Andrus said he was informed by Cotton, who was hired specifically for the meeting, that the inquiry was not a problem unless an investigation ensued. Andrus said it was Cotton’s advice not to reveal the inquiry to potential investors in disclosure documents on the summer bond issues.

“These are meetings, there are hundreds of these and no one discloses them unless there’s an actual investigation,” Andrus said. “If you learn something at the meeting then it’d be reportable. I asked the bond counsel, ‘What do you think?’ and he said, ‘Everything’s fine.’ ”

Cotton has declined to comment.

John Heine, an SEC spokesman, said his agency does not have explicit rules outlining whether an SEC inquiry is a material fact that must be disclosed in debt issuances.

“Quite often, corporate filers will include in disclosure documents a line about an SEC investigation,” Heine said. “The judgment as to whether that is a material fact or not is left up to the filer.”

Within the securities industry, Heine said, many people differentiate between a “formal” and “informal” SEC probe--the formal type is more serious and more likely to be a material fact that must be disclosed to investors.

Because there are no explicit distinctions, Heine said he could not classify the April inquiry into the Orange County investment fund as either formal or informal.

“The information that is gathered in the course of an informal inquiry can sometimes be just as important or damaging as the information gathered in a formal inquiry,” he said. “It’s up to the issuer as to whether it’s a material fact or not.”

Sam Gruenbaum, a Los Angeles securities attorney and former SEC investigator, said an SEC inquiry should be included in disclosure statements if “the subject is significant.”

“It is a judgment call,” Gruenbaum said. “There are gray areas. It can go both ways.”

Some of the scores of attorneys and investigators probing the county’s tumble into bankruptcy say Andrus should at least have alerted the Board of Supervisors, his primary client, that an inquiry was underway.

The State Bar of California Professional Rules of Conduct state that “a member shall keep a client reasonably informed about significant developments relating to the employment or representation and promptly comply with reasonable requests for information.”

Although Andrus represents the county and all its officials, his primary client is the county’s highest authority, the Board of Supervisors. Any discussion that occurs between Andrus and other officials, such as Citron, is not privileged and can be revealed to the board, Andrus and other county attorneys statewide said.

Andrus told The Times in December that he did not reveal the meeting to supervisors because the SEC told him to keep it confidential.

But on Wednesday Andrus said he chose to keep the meeting secret from supervisors because he worried that if word got out that the SEC was looking at the portfolio, it could start a run on the fund by skittish investors.

“The fact the meeting occurred, if it was misinterpreted, it could be damaging to other pool participants,” Andrus said. “I came out of there reassured that (Citron) knew what he was doing. It did not appear that he was engaging in any reckless behavior as far the pool was concerned.”

Andrus said he also was convinced that the SEC inquiry was prompted by the bitter election campaign in the treasurer’s race in which challenger John M.W. Moorlach questioned Citron’s high-risk investment strategies and warned that the investment pool already had lost more than a $1 billion.

“I was convinced at that time that the (SEC inquiry) was just a normal part of the political campaign,” Andrus said Wednesday.

Several of the supervisors say they should have been the ones to judge.

“We’re the ones that are constantly getting the crap beat out of us. . . . How the hell are we supposed to know if we’re not told?” demanded Supervisor Roger R. Stanton.

Since Citron was an independently elected official, the lines are murky about whether it was incumbent upon him to inform the supervisors about the SEC inquiry. But, Stanton said, Andrus should have told the board, his primary client, and allowed them to decide what to make of the news.

“I was very unhappy with the lack of feedback on the SEC inquiry,” Stanton said, adding that he would not have written Moorlach’s charges off as mere political rhetoric had he known of the SEC probe. “It certainly would have turned me. If I’d heard something like this in the spring I think I would have turned.”

Razzano, the former SEC attorney, agreed that Andrus should have notified the supervisors of the SEC probe.

“The Board of Supervisors is like the board of directors of a corporation. If you were a director you would want to know about allegations of wrongdoing in your company,” Razzano said. “I would think he has an obligation to tell the board. That would give the board the option of conducting their own inquiry if they wanted to.”

At today’s hearing, Andrus will likely face these questions as well as others about the way the ongoing crisis has been handled.

Sen. Quentin L. Kopp (I-San Francisco), who led the move last year to tighten the law requiring government agencies to conduct business in public, said he planned to query Andrus about whether county officials may have violated California’s open meetings law since the Dec. 6 bankruptcy filing.

Kopp also said he would press the county counsel about how he allowed the county to enter into contracts with public relations firms and legal and financial consultants when the county may not have the money to fulfill the contracts.

Times staff writer Dan Weikel contributed to this story.