Grand Jury Blames O.C. Bankruptcy on Supervisors : Government: Report soon to be made public faults Citron but calls board most responsible. Consultants warn problems could recur unless county management is reformed.

The Orange County Grand Jury is weighing and will soon make public a report concluding that a string of failures by the Board of Supervisors is largely to blame for the county’s financial debacle.

The grand jury report notes that the staggering investment pool losses that triggered the county’s unprecedented bankruptcy filing were the result of a “badly flawed investment strategy” pursued by longtime Treasurer-Tax Collector Robert L. Citron.

But, the report added, “the foundations of this financial disaster were clearly built on ineffective management,” primarily by the county supervisors.

The report was prepared for the grand jury by Kroll Associates, an international consulting firm that specializes in business controls and ferreting out information for its public and private sector clients. The firm was once employed by Kuwait to find the hidden overseas assets of Iraqi President Saddam Hussein.

In its report, Kroll not only blames the supervisors for much of what went wrong, but also warns that other financial troubles could befall the county unless its management structure is reorganized.

To avoid problems in the future, Kroll recommended that the treasurer no longer be an elected official, and that that office’s functions be placed under a strong chief executive officer and a chief financial officer appointed by the board.

“At present, the treasurer’s position is a political position, subject to the inherent risks attendant with political agendas,” the consultants wrote.

The Kroll study is the latest in a string of grand jury reports about county government. The secretive grand jury is conducting its own civil investigation of the county bankruptcy at the same time that it is hearing evidence of criminal cases being presented by the district attorney.

In May, the grand jury indicted former Assistant Treasurer Matthew Raabe on six counts of securities fraud and misrepresentation. His trial is pending.

In its examination of what caused the county’s bankruptcy, Kroll identified six “specific organizational weaknesses” that led to the county’s $1.7-billion securities trading loss last fall. Four of those weaknesses were directly attributable to the Board of Supervisors, Kroll found.

Those weaknesses included:

* “The Board of Supervisors’ failure to properly develop and drive effective oversight of the treasurer and his investment operations.”

* “The Board of Supervisors’ failure to gain an effective understanding of the risks inherent in the treasurer’s investment strategy [and] failure to take effective actions to manage this risk.”

* “The Board of Supervisors’ failure to take steps to participate in the development of rational treasury investment guidelines and operating strategy.”

* “The Board of Supervisors’ failure to develop, in conjunction with the county’s Auditor-Controller, an effective audit strategy” of the treasurer’s office.

The grand jury foreman said Wednesday that the report’s release was imminent, but he declined to comment on its contents.

“We expect to have a major report out before the end of the week,” Mario Lazo Jr. said.

Walter Jones, who chairs the grand jury’s administrative agencies committee, could not be reached for comment. Robert Fauteux, a member of the grand jury committee, said Wednesday that he could not comment on the report.

Supervisors Gaddi H. Vasquez, William G. Steiner and Roger R. Stanton, who were on the board at the time of the bankruptcy, were unavailable for comment.

County Treasurer-Tax Collector John M.W. Moorlach could not be reached at his home Wednesday night.

“The treasurer’s organization, as it exists today, is not suited to properly manage or direct the county’s investment portfolio,” the consultants wrote.

“The current design of the county’s treasury investment function is not sound,” Kroll wrote in the 48-page report dated Aug. 24 and marked “privileged and confidential.”

“It is . . . highly probable that unless meaningful changes are made to the county’s investment strategies, further financial decline will be inevitable,” Kroll concluded.

Kroll urged the county to hire full-time “investment professionals” to take over investing county funds, and to make these outside professionals follow “a rational investment process.”

“The county must reform the ways in which it currently operates, substantially upgrading the quality of its treasury operating tactics and strategies,” Kroll wrote.

Kroll also recommended that county completely revamp its oversight process, saying members of “the Oversight Committee should be politically neutral. Their ability to speak out is as important as their technical knowledge of investments.”

Moorlach, who warned last year that Citron’s investment strategy was excessively risky and highly vulnerable to changes in interest rates, was appointed in March by the supervisors to replace Citron, who resigned on the eve of the bankruptcy filing.

In its report, Kroll acknowledged that Moorlach and the new Treasurer’s Oversight Committee had corrected some problems, but it stressed that the county must treat the investment of county funds as “first and foremost a business.”

That means devising “a rational investment strategy, a rational organizational structure, a business-like approach . . . sophisticated technical skills and effective support systems,” Kroll wrote.

Finally, the consultants were critical of the lack of oversight by County Auditor-Controller Steve E. Lewis. Although Lewis is not named in the report, Kroll found that the internal controls of Citron’s office were reviewed by the auditor only every four years.

“This is inadequate based on the risk exposures for [this] type of operation” and the billions of dollars involved, Kroll wrote, adding that the office should be audited yearly.

* ENTER ALLEN: Assembly Speaker pushes bill to aid county recovery. A20

* STILL SHORTED: County hopes to recoup some of $106 million lent agencies. A20

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Grand Jury Recommendations

The Orange County Grand Jury, which will soon release a report blaming the Board of Supervisors for the county’s financial debacle, offered several recommendations for avoiding future crises:

* Maintain a strong chief executive officer with direct authority over all county functions, including the treasurer’s office.

* Have Board of Supervisors appoint the CEO.

* Create a chief financial officer’s position with direct responsibility for budgeting, finance, accounting and the treasurer’s functions.

* The CFO should be appointed by, and report to, the CEO.

* Replace the elected treasurer with one appointed by the Board of Supervisors.

* Separate auditor and controller duties.

Source: Orange County Grand Jury