Citron Aide Indicted in Bankruptcy Case : Investments: Ex-Orange County official Matthew Raabe is charged with misappropriating public funds, deceiving public agencies. He is jailed in lieu of bail.

For the first time Tuesday, a key player in the Orange County bankruptcy was behind bars, as the county grand jury indicted former Assistant Treasurer Matthew R. Raabe on felony charges of misappropriating public funds and deceiving unsuspecting public agencies into sinking money in the county’s now bust investment fund.

Raabe surrendered to authorities at a bail hearing in Orange County Superior Court and was being held at Orange County Jail on $500,000 bond--twice the amount typically recommended for first-degree murder suspects.

As the hearing ended, a silent, subdued Raabe was placed in handcuffs and led to jail. His arraignment and a bail review are scheduled for today.

Like his ex-boss, former Treasurer Robert L. Citron--who implicated Raabe when he 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. Citron is cooperating with the continuing investigation of the county debacle.

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 for $1-million bail, calling 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 filing.

Investigators from the Orange County district attorney’s office began tailing Raabe at 6 a.m. Tuesday, as the indictment was being drawn up. They watched him work out with his ex-wife at a health club, joined him for a matinee of “Crimson Tide” at 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 trying to evade his pursuers.

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

The fund, thick with complex securities sensitive to interest rate hikes, lost $1.7 billion last year as the Federal Reserve Board raised rates six times.

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

Prosecutors contend that Raabe helped Citron skim about $80 million in interest earnings from other pool investors, money that the pair allegedly placed in a county 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 found that $271 million in county losses were transferred to the entire pool, to be shared by 200 school districts, cities and special agencies.

However, prosecutors acknowledge that Raabe did not benefit personally from the alleged offenses. Similarly, they say Citron did not gain personally from the misappropriations of public money to which he pleaded guilty.

During his 10-year career in county government, Raabe was a high-profile booster of Citron’s strategies to investors throughout the state, at times serving as a salesman trying to draw investors into the portfolio.

Even before the financial crisis, Raabe--though he can appear shy and introverted--was known as his reclusive boss’ spokesman, often representing Citron in meetings with county officials and investors. His attorney said at Tuesday’s hearing that Raabe is seeing a psychiatrist four times a week.

Throughout the financial crisis, Raabe has maintained that he was merely following Citron’s orders and did not fully understand how badly the investment portfolio was performing. Just days before the county’s bankruptcy filing, he 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 as prosecutors mount their case against him.

When Raabe testified in January before the Senate committee in Sacramento, he said he had developed misgivings about the pool and discussed his concerns with other county officials. In the weeks before the bankruptcy, he added, 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.

When Citron resigned Dec. 4, the Board of Supervisors appointed Raabe acting treasurer. He held the position until Dec. 23, when he was demoted to his original post. He was removed from that job in January, after county accountants discovered the series of improper transfers in the county’s investment pool.

He was fired March 14.