Ex-Citron Deputy Raabe Indicted on Six Felony Counts : Bankruptcy: Former O.C. assistant treasurer is held on $500,000 bail after chase in mall lot. Attorney says he’ll fight charges of misappropriating funds, lying to investors.

The Orange County Grand Jury indicted former Assistant Treasurer Matthew Raabe on Tuesday on felony charges of misappropriating public funds and deceiving unsuspecting school districts, cities and public agencies into sinking money in the county’s failing investment fund.

After being tailed by authorities since daybreak--and leading a bizarre afternoon chase through a red light and stop signs in a mall parking lot--Raabe surrendered at a bail hearing in Orange County Superior Court and was being held at the Orange County Jail on $500,000 bail. That sum is twice the amount typically recommended for a first-degree murder suspect.

At the conclusion of the hearing, Raabe, who remained silent and subdued throughout the proceedings, was placed in handcuffs and led to the jail, where he was expected to spend the night as the first key player in the Orange County financial crisis to be incarcerated.

Like his former boss, ex-Treasurer-Tax Collector Robert L. Citron, who pleaded guilty to the same six counts April 27, Raabe faces a maximum of 14 years in prison and a $10-million fine if convicted.

Raabe’s attorney, Gary M. Pohlson, said his client “wants to stand and fight the charges. . . . Mr. Raabe just wants to stand up and have his day in court.”

Prosecutors had argued unsuccessfully for $1-million bail, calling the 39-year-old Raabe “unremorseful” and “uncooperative,” and reminding Judge David O. Carter that Raabe had previously tried to duck subpoenas to testify before a special state Senate committee investigating the bankruptcy.

The indictment of the No. 2 official in the county treasurer’s office comes less than three weeks after Citron pleaded guilty and chose to cooperate with authorities.

In so doing, Citron implicated his once-loyal, handpicked assistant, who often served as the aging treasurer’s chief spokesman and most ardent supporter.

As the indictment was being drawn up Tuesday, investigators from the Orange County district attorney’s office began tailing Raabe at 6 a.m. They watched him work out with his ex-wife at a health club, joined him for a matinee of “Crimson Tide” in a Costa Mesa movie theater and chased him as he sped through a red light and several stop signs in a shopping center parking lot in an attempt to evade his pursuers.

Pohlson said his client believed he was being followed by media reporters.

Raabe was offered the same plea agreement as Citron and told “he would be treated exactly the same,” Assistant Dist. Atty. Jan Nolan said Tuesday. But recently, Pohlson sent the district attorney’s office a letter saying Raabe was not interested in pleading guilty to the charges.

Pohlson said Tuesday that the district attorney’s office “has always offered” his client “the same deal as Citron,” but that Raabe refused to plead guilty because he insists he is innocent.

Nolan said the grand jury indictment was handed down about 2 p.m. Tuesday and Pohlson was told that Raabe had until 4 p.m. to voluntarily surrender. He was under surveillance, Nolan said, because he is a flight risk. “We’re taking every precaution,” Nolan said.

Raabe has portrayed himself as an unsophisticated finance officer who had little idea of how badly the investment fund was faring last year. But prosecutors contend he played an active role in misleading investors and persuading them to put their savings in the pool even as it was collapsing.

“I think the evidence that was presented to the grand jury is going to show Raabe is culpable,” Nolan said. “Even if he was following orders, is that an excuse or a defense? Based on the evidence we presented and the testimony, it appears he was doing more than following Citron’s orders.”

Pohlson said Raabe’s defense will hinge on his status as Citron’s “assistant.” Pohlson argued Tuesday that Raabe’s role was no different from Joy Cubbin’s, another employee of the treasurer’s office who has been told she is not a target of the district attorney’s probe.

Raabe is charged with six felony counts. Two involve charges of making untrue “material” statements in connection with the sale of securities. Four others concern the alleged misappropriation of public funds, failure to transfer public funds and maintaining false entries in a public record.

Raabe’s arraignment date is scheduled to be decided at a hearing today. A bail review hearing is scheduled for the same time. Although prosecutors wanted Raabe’s bail set at $1 million, Judge Carter ultimately cut that amount in half and indicated that he might further reduce the amount depending on testimony at today’s hearing.

Carter said he wanted to hear testimony from Raabe’s psychiatrist and information about Raabe’s finances.

Carter said he was concerned about Raabe’s driving incident just before his surrender and the danger he posed to himself and others. But he added: “I’m also mindful that he hasn’t enriched himself in any manner. Here is a person who hasn’t benefited except possibly by power, which can be just as ego gratifying.”

“I’m having a difficult time balancing all that,” Carter conceded.

According to prosecutors, Raabe and Citron lied to investors, never warning that the county’s investment pool was highly leveraged and losing money. The investment fund, jammed with complex securities sensitive to interest rate hikes, lost $1.7 billion last year as the Federal Reserve raised rates six times. When the investments ultimately soured, the county declared bankruptcy.

Prosecutors contend Raabe helped Citron skim about $80 million in interest earnings from other pool investors, money the pair allegedly placed in a county-held account. Investigators also charge that Raabe and Citron attempted to minimize the damage to the county’s investment holdings by transferring securities that were losing money into the investment pool, where the losses were spread among the investors.

A team of auditors also found that $271 million in county losses were transferred to the entire pool shared by about 200 school districts, cities and special agencies.

Prosecutors, however, acknowledge that Raabe did not benefit personally from the offenses he is accused of committing. Similarly, Citron did not gain personally from the misappropriations of public money.

Pohlson said Raabe, who was fired Feb. 25, is destitute and probably will ask to be represented by a public defender. But because the public defender’s office has been hit so hard by the bankruptcy, Pohlson predicted attorneys there will declare a conflict of interest.

In that event, Pohlson said he may be retained anyway and paid with public funds.

“I can’t afford to continue to represent him for free,” Pohlson said. “I’ve basically been doing that for a couple of months. He is indigent. He has no source of income. He has no assets.”

But with about 350 hours of work already under his belt on the case, Pohlson said it would make the most sense for Carter to select him rather than another attorney, who would have to begin from square one.

Despite the events of the day, Pohlson said, his client was “doing fine.”

“This is obviously a tough situation, but he’s doing fine,” Pohlson said. “He realizes that this is a lot tougher situation for all the people of Orange County.

“For the D.A. to say today that he showed no remorse is ridiculous,” he added. “They don’t see it, because he’s not pleading guilty. But he feels terrible for the people of Orange County.”

During much of his seven-year career in the treasurer’s office, Raabe was a high-profile booster of Citron’s strategies to investors throughout the state, at times serving as a salesman trying to lure investors into the portfolio. Even before the financial crisis, Raabe was known as spokesman for his reclusive boss, often representing Citron in meetings with county officials and investors.

But Raabe can also appear quiet and reserved. His attorney said at Tuesday’s hearing that his client has been seeing a psychiatrist four times a week. Raabe also filed a stress-related workers’ compensation claim against the county five to six weeks ago, prosecutors said Tuesday.

County officials said they hoped the county could proceed with its recovery from the financial crisis now that Citron has pleaded guilty and Raabe has been indicted.

“I’m happy to see the district attorney is moving forward aggressively to hold those persons responsible for the bankruptcy in a criminal setting,” Sheriff Brad Gates said. “I would hope that having Mr. Citron plead guilty, and now with the indictment of Mr. Raabe, that the anger people are feeling in the county will be put aside, so we can join together and get going on the recovery.”

County Supervisor William G. Steiner said Raabe believed in Citron’s investment strategy until it became clear the pool was failing.

“Matt carried Citron’s water. It’s pretty clear he fronted for him. But ironically, he was the first to blow the whistle on what was happening,” Steiner said. “He, like a lot of people, was a true believer in the gospel according to Bob Citron.”

Steiner said he believes Raabe will take his case to court and fight it all the way.

“I think Raabe feels he was simply taking direction and he’s not going to roll over on this easily,” Steiner said.

Throughout the financial crisis, Raabe has maintained he did not fully understand how badly the investment portfolio was doing. Just days before the county’s bankruptcy, Raabe downplayed the seriousness of the county’s financial troubles.

“This is a paper loss problem. It’s a liquidity problem, It’s something we need to work through, but it is not a crisis and it is not catastrophic,” Raabe said at a news conference. “While we’re concerned about moving forward and resolving some of the problems, we are not concerned that the fund is going to be going under.”

Exactly how much Raabe knew about the county’s ailing portfolio--and when he knew it--is certain to be a key issue in prosecutors’ case against him. When Raabe testified in January before a special state Senate committee examining the causes of the county’s bankruptcy, he said he ultimately had developed misgivings about the pool and discussed his concerns with other county officials.

He added that in the weeks before the bankruptcy, he worked with other county officials to develop a plan to prevent the pool from collapsing.

A county employee since his graduation from college in 1984, Raabe was promoted to the No. 2 spot in the treasurer’s office in 1993, although some were so unsure of his talents that he was placed on probation for a time.

He was removed from his job in January after accountants discovered the series of improper transfers in the county’s investment pool.

When Citron resigned Dec. 4, the Board of Supervisors appointed Raabe acting treasurer. He held the position until Dec. 23, when he was demoted back to his original post. In late January, county officials placed him on paid administrative leave for refusing to answer questions about the alleged illegal transfers.

Times staff writers Jodi Wilgoren, Rene Lynch, Susan Marquez Owen, Peter M. Warren and Anna Cekola contributed to this report.

More Coverage: O.C. in Bankruptcy

* MAGIC WORD -- “Willfully,” a word appearing six times in Raabe indictment, might be the key. A10

* RECOVERY BID -- County will sell more than $30 million in properties to highest bidder. A10

* DEFAULT LINES -- State panel hears parade of experts warning of disaster if county defaults. A10

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The Charges

The Orange County Grand Jury indicted former county Assistant Treasurer Matthew Raabe on six felony charges. Maximum punishment: 14 years in state prison and a $10-million fine. The counts against him:

* Untrue statements: Two counts of violating the Corporations Code--making untrue material statements in the sales of securities.

* Misappropriation: Four counts of violating the Penal Code--misappropriation of public funds, failure to transfer public funds, and maintaining false entries in a public record.

* Enhancement: Grand jury found that in the commission of the violations, the money losses exceeded $2.5 million.

Source: Orange County district attorney