ORANGE COUNTY IN BANKRUPTCY : Cox Wonders How Citron Got Past SEC

Rep. Christopher Cox (R-Newport Beach) said Tuesday that future congressional hearings should explore how former Orange County Treasurer-Tax Collector Robert L. Citron was able to satisfy the U. S. Securities and Exchange Commission when it looked into the operation of his investment pool eight months before it went bankrupt.

Cox emphasized that he is not questioning the thoroughness of the SEC’s inquiry into the highly leveraged investment fund, which subsequently suffered $1.7 billion in losses and dragged county government into bankruptcy as well.

Instead, Cox said Congress should look at what should have been disclosed that could prevent another such fiasco in the future.

“How is it that the rating agencies, the SEC, the entire market, was unable to learn about what Citron was doing? My guess is that Citron was providing the disclosure that was required by law,” said Cox, who added that disclosure requirements are less stringent for municipalities than for publicly held corporations.

During a 3 1/2-hour meeting at the SEC’s Los Angeles office last April, attorneys for the commission questioned Citron and other county representatives about the investment fund’s holdings, and requested documents that filled more than 20 boxes.

Because the SEC was apparently satisfied with the answers it got and took no further action, the agency’s inquiry was not disclosed in the official statements issued in connection with roughly $1 billion in county bond offerings later that summer.

Cox said Citron could have disclosed to the SEC all that was required under current law, but the disclosures were not enough to “alert one to the inherent dangers” facing the county’s investment pool.

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During last week’s state Senate hearing, the county’s outside bond counsel, Jean M. Costanza, testified that she did not “believe that the SEC inquiry rose to the level” of a material fact that must be disclosed to potential bond buyers.

But “what kinds of information did Bob Citron provide to the SEC? Was it accurate or was it false and misleading? It remains to be seen what are the lessons of the SEC’s involvement,” Cox said.

“It’s a little bit like the Polly Klaas tragedy, where the murderer was stopped by police, but they did not realize who he was,” Cox said, referring to last year’s kidnaping and slaying of a young Petaluma girl.

He noted that bond rating agencies and the markets had also been “kept in the dark,” apparently because of inadequate disclosure by Citron.

Following the county’s bankruptcy filing, Cox, a member of the House Commerce Committee, called for legislative hearings on the collapse of the Orange County investment pool.

He has proposed legislation that would require local government agencies to provide extensive and periodic financial disclosures when they issue bonds and other securities.

Cox said if such information is publicly disclosed, then financial markets can gauge the soundness of the bonds and securities being offered without relying on the SEC.

Cox said legislative and investigative hearings may be held in the spring--after Congress finishes considering the “contract with America” legislation, and after the SEC and other agencies have completed their own probes into the handling of the Orange County investment pool.