Appeals Panel Voids Sole Jury Conviction in Bankruptcy

The sole jury conviction stemming from Orange County’s historic 1994 bankruptcy was tossed out Wednesday by an appeals court, which ruled that former Assistant Treasurer Matthew R. Raabe didn’t receive a fair trial and that prosecutors had “overwhelming” conflicts of interest.

The ruling, if upheld, means that of the six county officials charged with misdeeds in America’s largest municipal bankruptcy, the most time anyone will likely spend behind bars is the 41 days Raabe served before being released on bail pending his appeal.

In a stinging opinion, justices of 4th District Court of Appeal said former Dist. Atty. Mike Capizzi should never have taken on the Raabe case because his office was directly affected by the county’s financial collapse.

Moreover, the justices ruled Capizzi had an additional conflict because he served as one of three managers who ran the county in the weeks following the declaration of bankruptcy.

“A prosecutor is not disinterested if he has . . . an ax to grind against the defendant,” the justices wrote, citing language from a similar case.

A spokesman for the state attorney general’s office, which is handling the appeal, said it hasn’t decided whether to drop the case or ask for state Supreme Court review. The high court has already refused to reinstate the two other bankruptcy-related prosecutions that have come before it.

The ruling, released Wednesday, comes three years after a jury convicted Raabe of five felony counts for concealing the county’s risky investment strategy by siphoning nearly $90 million in interest earnings from local cities and school districts. A judge later sentenced Raabe to three years in state prison.

Raabe, who was released on $25,000 bail after serving less than two months of the term, declined to comment. He moved to Northern California after the trial.

Raabe was a prime target of the district attorney’s office in its two-year, $4-million criminal probe, and his conviction was considered a high point of the investigation.

Raabe’s boss, former Treasurer Robert L. Citron, agreed to a plea bargain that allowed him to serve his nine-month sentence in a work furlough program in exchange for cooperation. Citron worked in a jail commissary during the day but was allowed to go home at night.

In the case of former county Budget Director Ronald S. Rubino, a jury hung 9-3 in favor of acquittal; he later pleaded no contest to one record-keeping violation under a deal that allowed his record to be erased after a year.

Civil misconduct charges brought against two county supervisors and the auditor-controller were dropped after the same appellate court declared conflicts by Capizzi’s office. The attorney general’s office declined to pursue the charges.

Some county leaders were stunned by Wednesday’s development, given that Raabe was the only official to have faced prison time.

“It is unfortunate that it may be that no one person will have incurred a significant punishment for their direct involvement in the largest municipal investment scheme loss,” said current Treasurer John M.W. Moorlach.

Stan Oftelie, the former head of the Orange County Transportation Authority, also expressed puzzlement over the ruling.

“Taking money from one government agency and illegally transferring it to another is a crime,” he said. “The one crime in this was the skimming of the interest money. That was fundamentally dishonest.”

But others said the county’s case against Raabe was flawed from the start and that overzealous prosecutors tried to make him a scapegoat.

“I always felt that Matt was a good man who got swept up in that mess like a lot of people,” said former Supervisor William G. Steiner, one of those who faced civil misconduct allegations.

The county plunged into bankruptcy on Dec. 4, 1994, after Citron’s risky investment strategy caused a pool containing the money of local cities and school districts to lose $1.64 billion in value.

In the early weeks of the crisis, Raabe was hailed as a hero for helping the county begin repairing the financial damage. But when auditors discovered that the treasurer’s office had illegally skimmed interest money from excessive profits earned through its risky investments, Raabe was fired.

Raabe was convicted of securities fraud and misappropriating public funds in connection with diverting the hidden interest amounts. The money was deposited into the county’s general fund for use by county government; neither Citron nor Raabe was accused of diverting any of the money for personal use.

Raabe’s attorney tried to get the district attorney’s office removed from the case early on, but a judge rejected their request.

The appeals court, however, said a conflict of interest was obvious.

The justices noted that the bankruptcy forced the district attorney to reduce staffing, institute a hiring freeze and defer salary raises for some prosecutors. The finances of one, and possibly two prosecutors on the case, the court said, were also personally affected by the cuts.

“Clearly, the Orange County district attorney’s office and its staff were directly affected by that financial debacle,” wrote Presiding Justice David G. Sills, the opinion’s author. “‘This conflict was sufficiently grave to render it unlikely Raabe received fair treatment during all portions of the criminal proceedings.”

The court also held that Capizzi’s role in attempting to repair the damage caused by the bankruptcy also created a conflict. “The difficulty [is] in separating the district attorney’s activities in managing county operations . . . from his prosecutorial investigations,” the opinion states.

The opinion focused primarily on the conduct of the district attorney’s office and did not directly examine the evidence prosecutors presented against Raabe at the trial.

Capizzi, who left office two years ago and now works as a private attorney, could not be reached for comment Wednesday. In the past he has said his office did a first-rate job making its way through the complex world of municipal finance to determine who should face prosecution for their role in the bankruptcy.

It’s unclear whether Raabe will attempt to seek compensation for his time behind bars. A new state law sponsored by Assemblyman Scott Baugh (R-Huntington Beach) makes people wrongly convicted eligible for $100 for each day they served behind bars.

Under that formula, Raabe would be eligible for $4,100. But he would have to win a court order finding him “factually innocent” of the charges.

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Times staff writer Stuart Pfeifer contributed to this report.