Citron Says He Never Told O.C. Budget Chief of Scheme

In his first public appearance in more than a year, Orange County’s disgraced former treasurer unexpectedly testified Tuesday that he never told former Budget Director Ronald S. Rubino of his plans to illegally divert millions of dollars belonging to cities and schools into the county treasury.

Robert L. Citron was supposed to be a key witness against Rubino, who is on trial on felony charges that he aided and abetted Citron’s scheme to divert for the county’s benefit nearly $100 million belonging to cities, schools and special districts that had deposited their funds in the county-run investment pool.

When Citron took the stand, however, he instead pointed fingers at his former top assistant, Matthew R. Raabe, and Merrill Lynch & Co., the giant Wall Street brokerage firm that sold Citron about 70% of the securities in Orange County’s risky investment portfolio.

The Citron-managed investment pool suffered $1.64 billion in losses in the fall of 1994, triggering the largest municipal bankruptcy in U.S. history.

Citron testified that Raabe and Merrill Lynch salesman Michael Stamenson knew that excessive interest earnings were being siphoned out of the investment pool accounts of cities and schools to shore up the county treasury.

But when Rubino’s attorney asked Citron if he had told his client of the illegal skimming operation, the former treasurer replied: “No, I never told Mr. Rubino.”

During two hours of testimony, Citron said Raabe came to him in April 1993 to warn that about 200 agencies with money in the investment pool might suspect that their reserves were being used for risky investments if the county distributed all the money being earned on their deposits.

“As Mr. Raabe explained it to me, the pool participants would think there was something wrong about obtaining [excessively] high interest [earnings] and, feeling that way, they were liable to withdraw their money,” Citron said.

The former treasurer said he agreed with Raabe’s suggestion to transfer earnings from the investment pool into a special county account, where it was used to earn tens of millions of dollars for the county’s general fund.

Citron said Stamenson, a top broker in Merrill Lynch’s San Francisco office, was the only person he told about the diversion scheme.

“Other than Mr. Stamenson, no, I didn’t tell anybody else,” Citron said during cross-examination.

Raabe has pleaded not guilty to six felony counts of securities fraud and misappropriation--the same charges to which Citron has previously pleaded guilty.

In testimony before the Orange County Grand Jury, Raabe identified Rubino as an architect of the illegal diversion scheme. But citing his 5th Amendment right against self-incrimination, Raabe has refused to testify in Rubino’s trial. Raabe is scheduled to go on trial next month.

Without Raabe’s testimony, the prosecution is having a difficult time linking Rubino to the diversion scheme. To compound matters, Citron testified Tuesday that he could not recall Raabe telling Rubino about the scheme.

Rubino’s attorney, Rodney M. Perlman, has argued during the trial that his client was a mid-level county employee who was simply following county policies and his bosses’ orders. Rubino, 44, was not aware of any illegal skimming operation and even doubts that it occurred, Perlman has said.

Rubino’s trial--the first criminal trial stemming from the county bankruptcy--marked Citron’s first public testimony since his January 1995 appearance before a special state Senate committee in Sacramento.

The 42 seats in visiting Judge J. Stephen Czuleger’s courtroom were filled even before Citron took the witness stand about 9:15 a.m. Tuesday. Among those jostling for seats in the courtroom were county lawyers, a battery of attorneys hired by Merrill Lynch, and Citron’s attorney, David W. Wiechert.

Dressed in a gray suit, Citron walked into court and confidently responded, “I certainly do,” when asked if he swore to tell the whole truth.

Under questioning by the prosecutor, Assistant Dist. Atty. Jan J. Nolan, Citron recalled meeting Rubino about two to three times in 1993 to talk about the “newly found funds” that were being sent to the county’s treasury.

Rubino was “overjoyed that we were providing these additional funds to the county” and even joked about calling the special treasury account “Citron’s trust fund or annuity fund,” according to Citron.

The fund was eventually called the Economic Uncertainty Fund, and the Board of Supervisors was told that it would earn up to $13 million a year for the county.

Under cross-examination by Perlman, Citron said he had told county supervisors and the heads of all county departments about his investments in exotic securities yielding higher investment returns. He believed that he had perfected an investment strategy that would maximize returns, and was proud that he was able to earn handsome profits for pool participants, Citron testified.

The former treasurer explained how he could earn up to $4 million a year investing only $750,000 in a security known as “a reverse against itself.”

Merrill Lynch officials, Citron testified, had told him that these securities--and others he bought from the brokerage--were safe.

Citron said he would tell Stamenson on a monthly basis about the two different earnings rates--the rate he was paying the pool participants, and the rate he was earning on the risky investments. The prosecution contends that during a period in 1993 and 1994, Citron paid the pool participants 7.85% on their deposits when he was actually earning a return of 11.5%.

Merrill Lynch officials Tuesday released a statement saying that Stamenson “was not involved in the internal record keeping of the [treasurer’s] office and had no knowledge of any improper activities.”

The brokerage, which is defending itself against a $2-billion damage suit filed by the county, has consistently denied any wrongdoing.

After Citron’s testimony, Czuleger said he will set the former treasurer’s sentencing date at a Sept. 10 hearing.

Citron faces up to 14 years in prison, but a Probation Department report has recommended that he be sentenced to a year or less in the county jail and probation.