Probe Zeroes In on Raabe, Merrill Lynch

Orange County prosecutors on Friday sharpened the focus of their criminal investigation of Assistant Treasurer Matthew Raabe and Merrill Lynch & Co. for financial dealings related to the county’s now-collapsed investment pool, sources close to the inquiry said.

With Raabe facing charges as early as next week, sources added, his attorney, Gary M. Pohlson, is scheduled to meet with district attorney officials on Monday.

Pohlson insisted again Friday that Raabe had done nothing wrong.

The day before, Raabe was implicated by former Treasurer-Tax Collector Robert L. Citron, who pleaded guilty to defrauding investors and agreed to cooperate with prosecutors. Raabe was Citron’s top deputy for the past two years and helped recruit investors for the pool.

Officials believe Citron’s testimony will also reveal more fully the role played by the giant brokerage firm in constructing the county investment pool, which lost $1.7 billion when interest rates soared and eventually forced the county into bankruptcy last December.

Sources said Citron knew by April, 1994, that the pool he managed was in serious trouble, yet that information remained a carefully controlled secret until last November.

“The big question is who knew that and what did they do when they found out,” one source said, noting that the county raised $1.2 billion in new bond issuances after Citron had clear indications his investment strategy was failing.

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Investigators believe Raabe could provide even more details than Citron about investment transactions and bond issuances after April, 1994, especially transactions involving Merrill Lynch.

“We hope he comes to his senses,” the source said of Raabe, and “comes in.”

Investigators and a California Senate committee have raised questions about Raabe’s role in encouraging school districts to invest in the fund last year. Raabe told senators that “we were not selling the fund.”

But Raabe told senators that nearly three months before the bankruptcy, he had developed misgivings about the pool and discussed them with other county officials. And, in the weeks before the bankruptcy, he worked with others to develop a plan to prevent the pool from collapsing. Attorneys representing Raabe said Citron’s guilty pleas will have little effect on their client if he is charged.

“It really doesn’t change anything,” Pohlson said of Citron’s deal.

“It’s surprising in that you never think of the person who is most culpable getting the deal to rat out the little people,” Pohlson added. “But we had anticipated something like this happening, so it wasn’t a surprise. What defense did Citron have? He did it, he took the county down.”

Pohlson said he has been encouraged by authorities to make a similar plea agreement for Raabe, but has no plans to do so.

Citron, in his plea agreement, said that “with the assistance of Matthew Raabe” he committed a felony when he misappropriated more than $80 million in interest from other pool investors for the county’s use, and misrepresented the financial condition of the pool.

But, Pohlson said, “Citron is being less than honorable in now trying to lay out Matt,” who, he added, “did nothing but hard work. He was just doing what he was told.”

Terry W. Bird, another attorney working for Raabe, downplayed the importance of the Citron’s plea agreement.

“Of course he did it with the assistance of Matt Raabe. He did it with the assistance of the secretaries there, and a lot of the other people in the county. But I don’t know that those people are going to be charged or convicted,” Bird said. “Matt never said he didn’t assist Bob Citron. He said he didn’t do anything he knew was wrong.

“If (Citron) said Matt Raabe knew what he was doing was wrong,” Bird added, “then he’s lying.”

Several attorneys said Citron’s deal indicates the district attorney’s office is looking both above and below the former treasurer. “I would think that they’re looking at everybody involved in county government at a high level,” Pohlson said.

The sources cautioned that although the investigation is shifting toward Merrill Lynch, “nothing is imminent,” as investigators are still digging and witnesses are being interviewed.

“As a matter of policy, we do not comment on investigations except to say that we always cooperate fully with any government inquiry, said Merrill Lynch spokesman Timothy Gilles.

Beyond Raabe and Merrill Lynch, the sources said, the investigation is expected to proceed on two levels: internally, on matters involving the county and county officials, and externally, on matters involving companies and individuals who did business with the county.

The district attorney’s investigation is one of three ongoing probes into the collapse of Citron’s investment pool and its trading loss. Both the U.S. Securities and Exchange Commission and the U.S. attorney in Los Angeles have issued subpoenas and interviewed officials.

Both county and SEC investigators have asked numerous questions about relationships between county officials and current and former members of the Board of Supervisors, and the Wall Street and other municipal financial firms that enjoyed lucrative business relationships with the county.

Last December, the SEC subpoenaed the calendars and bank statements of the Board of Supervisors.

“The investigators want to know about the whole ‘pay-to-play’ issue,” said one high-ranking county official, referring to allegations that some financial firms received special treatment on the basis of campaign or other contributions. “They asked a lot of questions about elected officials.”

Michael Fine, director of financial services at Newport-Mesa Unified School District--one of four school districts Raabe reassured about the pool--said the county has asked him to provide “board resolutions, interest statements (from the county treasurer), things like that.”

The SEC investigation, say those who have been questioned, is being conducted by investigators in New York and Los Angeles. New York investigators are said to be focusing on the activities of investment banks and firms that did business in Orange County, including the role played by Merrill Lynch & Co.

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Officially, the SEC won’t comment on its investigation. But a securities lawyer familiar with it said the agency has issued two “formal orders of investigation,” documents that name individuals and firms subject to the inquiry.

The agency will release the orders to attorneys but they must sign an agreement not to disclose the contents.

The securities attorney said the only two county individuals named in the SEC orders are Citron and Raabe. But virtually every major investment firm that did business in Orange County appears.

One key area of focus for the SEC, the attorney said, involves the “disclosures” made in the Official Statements that accompanied the county’s bond issuances.

“This is a big enough case that everybody who knows anything is going to be asked about it by everybody,” the attorney added.

Finally, FBI agents have been conducting interviews for the U.S. attorney in Los Angeles, and one county official has received a federal grand jury subpoena.

The high-ranking county official, who was also subpoenaed to appear before the SEC, said the U.S. attorney appears to be looking at “mail fraud” and “money laundering that may have involved kickbacks,” in connection with the county’s investments and bonds. But from the questions, the official added, “It doesn’t look like they’re focusing on public officials, just investment firms.”