Lawndale officials this week said they will move quickly to adopt a formal investment policy after learning that former Treasurer Ray Wood lost $1.9 million in city funds in a speculative securities deal.
The officials also said they were stunned last week when they first learned from the city's auditors that Wood, who for the past 27 years has served as treasurer for numerous cities throughout Southern California, had made such a transaction in the first place.
"We're talking about a 62-year-old veteran," City Manager Paul Philips said. "He is a dean of the industry."
Mayor Sarann Kruse, recalling the closed-door meeting last Thursday night at City Hall during which council members were informed of the bad investment, said she and her colleagues were "dumbfounded" because of Wood's reputation as a respected, conservative money manager.
"I think we would have fallen off our chairs if we hadn't been sitting in front of a table," Kruse said.
Wood, who for the past four years worked on a contract basis for Lawndale and earned $770 a month, was fired at the meeting. Kruse said Wood, who attended the meeting, was remorseful. "He said, 'If I had the money in my checking account, I would sit down and make you out a check,' " Kruse said.
Wood also was dismissed last week from his treasurer's post in San Marino and resigned as finance director in Palmdale after officials learned he had made the same kind of investment for those cities.
"I made an error in judgment," Wood said in an interview. "I didn't realize what was happening until I was trapped."
From 1954 to 1960, Wood served as director of finance for Beverly Hills. For four years, he taught a finance course at USC and, in 1957, founded the California Society of Municipal Finance Officers.
Since 1960, Wood said, he has worked in various jobs, most related to municipal finance, for more than 100 cities. Until last week he held contracts with five cities. He currently is treasurer for Westlake Village and serves as a management consultant for Hawaiian Gardens.
Officials in Lawndale, San Marino and Palmdale said that once accountants finish their audits, they will ask the county district attorney to investigate whether the investments were legal. The officials said they have no knowledge that Wood personally profited from the investments.
Philips estimated that because of the $1.9-million loss, Lawndale will lose about $167,000 in interest income a year. Although the $1.9 million represented nearly two-thirds of the city's general fund reserve, no city services will be affected, he said.
Together, the cities estimate they could lose a total of nearly $8 million from their general fund reserves because of the investments, which were made in government bonds bought on margin.
In a margin account, an investor puts down only a fraction of the price of a security, hoping the market will rise. However, if the market falls more than the amount invested, the entire investment is wiped out unless the investor puts in additional funds.
Cities the size of Lawndale typically invest surplus cash in low-risk certificates of deposits or in the state treasurer's Local Agency Investment Pool, according to an accountant who works in municipal finance and spoke on condition of anonymity. The pool provides a city with a competitive rate of return on its money, and the money can be retrieved instantly if necessary.
Although many cities do not have specific investment policies, state law explicitly states the types of transactions that a city can make with its surplus funds. Margin accounts are not specifically authorized investments under state law, according to Palmdale City Atty. Graham Ritchie.
Contacted by phone this week, Wood declined to discuss specifically the investments he made for Lawndale, San Marino and Palmdale, except to say they were identical in all three cities. He said he did not make similar investments for Westlake Village or Hawaiian Gardens.
Wood said he initially felt the investments were conservative. He said he was unaware that the investments were violations of state law, as officials from the three cities contend.
Lawndale officials said that although Wood made the speculative investment in the summer of 1986, it was not discovered last fall when city financial records were audited because the investment was earning money and no margin calls had been made.
However, the city discovered in the audit now under way that at least two margin calls had been made since the last audit. City officials said they presume that the margins were made sometime since last spring, when the bond market began to tumble. Most recently, the city was contacted two weeks ago and informed by the brokerage firm handling the account that the city would have to invest an additional $40,000 to meet the latest margin call.
Instead, the city decided to cut its losses and refused to pay.
Philips said that Lawndale, like most cities its size, gives its treasurer a great deal of freedom to invest general fund reserves. Typically, he said, a treasurer has the authority to move the funds from one account to another without the approval of any other city official.
Such transfers are usually made electronically, and the city would later receive a written notification confirming the transaction. In Lawndale, Philips said, such notifications are sent to the treasurer and no other city official would normally see it.
Lawndale officials routinely receive written reports from the treasurer throughout the year outlining the city's financial status and its investments. However, recent reports by Wood did not provide details of the speculative investment, according to city officials.