California Corporations Commissioner Demetrios A. Boutris has proposed meeting a state budget-cutting goal by eliminating his entire investigative staff, a unit with front-line statewide responsibility for combating investment fraud.
The agency still hopes to avoid layoffs, Boutris said in an interview Thursday, but the decision is in the hands of the state Finance Department, which must pare $855 million from existing state employee contracts for the fiscal year starting July 1.
Boutris defended his proposal as the “least disruptive” option available to him. He said he would have been confronted with objections if he had targeted, for example, financial examiners or staff attorneys instead of investigators.
The Department of Corporations’ 13 investigators would lose their jobs; they include veterans who worked on such high-profile cases as the 1989 collapse of Charles H. Keating Jr.'s Lincoln Savings & Loan. The department’s investigators typically work on lower-profile frauds, such as pyramid schemes, phony limited partnerships and other scams whose victims tend to be elderly.
The loss of the investigators could cause such “retail” fraud cases to fall through the cracks, said Richard A. Lowenstein, deputy Los Angeles district attorney in the major frauds unit.
“You can’t just kick it over to the locals,” Lowenstein said. “We have investigators, but we don’t have the knowledge to take this over by ourselves.”
The state investigators -- about half of whom are based in Los Angeles, with the rest in San Diego, San Francisco and Sacramento -- were notified of their proposed fate in a conference call last week with several of Boutris’ top aides.
On Tuesday, state personnel officials visited the investigators and handed them packets explaining their rights in the event of layoffs and telling them that written notification of their “surplus” status could come as early as this weekend, several investigators said in interviews.
Boutris’ proposal was in response to a mandate from Gov. Gray Davis that all state departments submit plans to meet a 10% cutback goal, just the latest round of belt-tightening as the state confronts a record $35-billion budget gap.
Layoffs would go into effect if the state fails to get $855 million in salary and benefits concessions from its unions, said Lynelle Jolley, spokeswoman for the Department of Personnel Administration. A final decision may still be weeks away, she said.
Some state departments have proposed cuts so severe that some officials have questioned whether they are serious. For instance, the state’s prison system has proposed abolishing all supervision of paroled felons, prompting one state senator to compare the idea to a university that reacts to budget cutbacks by threatening to shut down a campus.
Kevin Peralta of the California Union of Safety Employees (CAUSE), which represents the state investigators, said that when he first got wind of the layoff plan last month, “I thought it was maybe a ploy to get the unions to give up 5% or 10% of negotiated pay, which isn’t going to happen.”
Now, however, Peralta said he is taking the possibility far more seriously.
Union members “are experiencing layoffs for the first time” in other state agencies, Peralta said, and there’s no reason to think it can’t happen in the Department of Corporations.
The Boutris proposal comes as state securities regulators across the country are basking in unaccustomed limelight after last week’s $1.4-billion settlement of conflict-of-interest charges involving research analysts at 10 of Wall Street’s largest brokerages. The states, led by New York Atty. Gen. Eliot Spitzer, played an unusually prominent role in the nationwide investigation.
California, along with federal authorities, oversaw the investigation of two firms, Deutsche Bank and San Francisco-based Thomas Weisel Partners, neither of which was included in the settlement.
The Department of Corporations investigators have not played a major role in the Deutsche and Weisel probes, which have been conducted largely by the department’s staff lawyers.
Deutsche was dropped from the deal after it acknowledged failing to deliver e-mails sought by investigators, but said it would supply the missing material. That probe continues. The Weisel firm did not sign on to the settlement because of an impasse in negotiations.
The department investigators tend to pursue street-level fraud involving unregistered securities and unlicensed dealers, often responding to complaints phoned or mailed in by victims. As is typical when the stock market is slumping, the number of such complaints has risen for three years straight, according to department statistics.
Several investigators, who spoke on condition of anonymity, complained in interviews this week that Boutris has cut back on their ability to cooperate on criminal prosecutions with district attorneys and other local prosecutors.
Lowenstein said the level of cooperation has “fallen off like a straight drop” in the two years since Boutris took office.
Boutris replied that when such cooperation means providing manpower to outside agencies without reimbursement, his budget doesn’t permit that. He noted that his budget is controlled by the Legislature and that staffing has shrunk to 264 people from about 340 when he took office.
“These are difficult calls to make in a contracting budget environment,” Boutris said.