O.C. Grand Jury Hears Testimony on Failed Pool

Three months after their highly visible raid of the offices of former Treasurer-Tax Collector Robert L. Citron, Orange County prosecutors took a first step toward seeking criminal indictments this week, summoning county officials to testify before the grand jury.

The subpoenas mark the first sign that any of the various state and federal investigations into the Orange County bankruptcy are nearing fruition. Sources close to the grand jury probe say it will focus initially on Citron and his chief aide, Matthew R. Raabe.

On Thursday, two officials in the county auditor-controller’s office testified: John Nakane, head of the internal audit division that prepared a critical audit of Citron in 1993, and Fred Leblow, an audit manager.

Chief Deputy Auditor Chuck Hulse said he is scheduled to appear Tuesday and that embattled Auditor-Controller Steve E. Lewis also expects to be summoned.

“We’ve been told by the investigators that we are not the targets, nor is Steve,” said Hulse, whose office approved transfers of money under investigation in the probe.

Neither Citron’s attorney, David W. Wiechert, nor Raabe’s attorney, Gary M. Pohlson, could be reached for comment. Both attorneys have consistently denied any wrongdoing by their clients.

Other county officials are scheduled to testify in coming weeks.

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The county grand jury summons come as the Securities and Exchange Commission is issuing a second wave of subpoenas to county employees, and the federal grand jury in Los Angeles begins calling key county officials.

About 10 employees of the county treasurer’s office have been questioned by the SEC in recent weeks, with some sessions lasting an entire day, a high-level source in the treasurer’s office confirmed. The SEC earlier interviewed Citron and Raabe.

Six employees in the auditor-controller’s office, including Hulse and Lewis, are scheduled to talk with SEC attorneys this month, and two have already been interviewed. SEC officials have requested that Hulse and Lewis provide their personal calendars for the past two years.

“I guess they’re going to be looking for meetings,” Hulse said.

The SEC, which has previously gathered the personal records of county supervisors and other officials, is focusing on whether securities laws were broken and is examining the relationship between the county and securities brokers, including Merrill Lynch & Co.

One employee questioned two weeks ago said the SEC attorneys asked a number of questions about top Merrill Lynch broker Michael Stamenson, who sold Citron some of the risky investments that are believed to have led to county’s Dec. 6 bankruptcy.

Brokerage giant Merrill Lynch helped underwrite huge quantities of Orange County bonds, including a controversial $600-million taxable issue floated last summer to raise money for the county’s failing $7.5-billion investment pool. The county is suing Merrill Lynch and Stamenson.

Merrill Lynch has repeatedly denied any wrongdoing.

The SEC also is looking at whether county officials engaged in fraud and misled banks about the county’s true financial condition.

SEC attorneys questioned treasurer’s office employees on office practices and accounting methods, with most of the attention focused on bond deals and how funds were allocated and moved between Citron’s different investment pool accounts or funds, an employee said.

A team of accountants hired by the county and the state auditor has found that between April, 1993, and June, 1994, Citron, or someone in his office, ordered transfers among various accounts that had the effect of skimming $93 million in interest income due other pool investors into county coffers.

Both county and federal attorneys also are examining as much as $300 million in county losses that were shifted to the other 190 cities and schools in the pool after Citron’s gamble with county-owned securities went bad.

Both the SEC and Orange County prosecutors also are focusing on whether the county issued false or misleading statements about risk to investors in the county pool and to the buyers of Orange County bonds.

Michael Fine, the director of fiscal services at Newport-Mesa Unified School District, said he has been interviewed by both agencies. Newport-Mesa was one of four school districts assured by Raabe in July, 1993, that their investments in the pool were not at risk.

“The district attorney was concerned about how the pool was represented to us,” said Fine, who also gave a day-and-a-half deposition to SEC attorneys last month.

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The U. S. attorney’s office, which has maintained a low profile in the investigation, also appears to be concentrating on the relationship between the county and securities brokers.

In January, the federal prosecutors issued subpoenas relating to “the issuance, marketing or sale of Orange County securities” to the treasurer’s office, the auditor-controller’s office and the county administrative office.

One top county official, who has recently been subpoenaed by the county grand jury, the federal grand jury and the SEC, said it appears the U. S. attorney is looking at “fraud and money laundering,” among other crimes.

Thursday, the district attorney’s bankruptcy investigation suffered a blow when its top investigator, James (Rusty) Hodges, took an early retirement offered by the county as part of the continuing effort to slash its budget. The district attorney’s office was ordered Thursday to cut $2 million from its budget.

But Dist. Atty. Michael R. Capizzi said Hodges has agreed to come back as a contract worker to see the probe through.

“This is the No. 1 priority and will be given every resource to resolve it,” Capizzi said. “(Hodges) has been an integral part of this investigation. . . . He’s going to be an immense loss.”

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