Report Lays Much Blame on Board for O.C. Debacle : Bankruptcy: Grand jury says supervisors failed to properly oversee county investment strategies. It also says treasurer should not be an elected position.

The Orange County Grand Jury will soon make public a report blaming the county’s financial debacle largely on a string of failures by the Board of Supervisors.

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

But, the report adds, “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 strongman Saddam Hussein.

In its report on Orange County, Kroll not only blames the supervisors for much of what went wrong, it 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 the 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 R. 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 were directly attributable to the county board, Kroll found.

They were:

* “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 . . . strategy” for auditing 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.

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

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

The firm urged the county to hire full-time “investment professionals” to take over the investing of 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.

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