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District Was Told of Investment Loss, Reports Show

November 26, 1987|JEFFREY MILLER | Times Staff Writer

The Three Valleys Municipal Water District was informed that it was losing money on its investments with E. F. Hutton and Co. more than eight months before the district's board of directors says it was told of any losses, a review of monthly reports prepared by the investment firm shows.

The monthly reports, provided to The Times by Three Valleys board member William Koch, indicate that the net worth of the district's portfolio had fallen more than $200,000 by December, 1986, a month after the district invested $1.5 million with Hutton.

Three Valleys General Manager Richard W. Hansen has said he was unaware that the district was losing money on its investments until Hutton representatives informed him last April of a $200,000 "paper loss." Hansen has said he did not realize the seriousness of the losses until September, when he told the board of directors that the district had lost $900,000.

In an interview this week, Hansen said he did not see the monthly reports, which were reviewed by a member of the district's staff. The staff member, Chris Francisco, compiled reports from Hutton and four other investment firms and provided summaries of all the district's investments to Hansen and the board members. The summaries never indicated the declining value of the Hutton account, Hansen said. Francisco has refused to comment.

Although the Hutton report for December--received by the district on Jan. 8--showed that the net worth of Three Valleys' portfolio had fallen from $1.5 million to $1.29 million, Hansen said he was not informed.

"I was not aware of it, and I think it probably wasn't until April that any of this was brought to my attention," Hansen said.

Hansen said he does not blame Francisco or any other staff members. None of the staff members are financial experts, Hansen said, and they depended on Hutton's investment expertise.

Steve Nelson, a spokesman for Hutton in New York, would say only that the firm received proper authorization for all investments made.

According to the monthly reports from Hutton, the net worth of the district's portfolio had fallen to $637,270 by the end of April and was never more than $744,889 at any time thereafter.

The money lost by the district was invested in government bonds purchased "on margin," a practice whereby investors borrow money to augment their deposits. Trading on margin can be lucrative when the bonds increase in value, but is costly to investors when the securities' value decreases.

Three Valleys intends to file suit against Hutton by the end of next week, claiming that the investment firm engaged in margin trading without authorization and did not accurately inform the district of the portfolio's status, Hansen said.

However, the monthly report from Hutton last December said that the district's funds had been invested on margin.

By September, the bonds' value had dropped to the point that the district began receiving "margin calls" from Hutton--requests to sell off securities or invest more money to cover the loans. On Sept. 22, Hutton liquidated the Three Valleys account to satisfy the margin calls and billed the district for an additional $58,000 not covered by the funds remaining in the account.

Hansen has said he did not know the district's money had been invested on margin until an April meeting with Hutton representatives. He said he did not understand until much later that the entire portfolio was at risk.

"They never explained to us that we had a margin account, or what a margin account was or what it could do to our portfolio," Hansen said.

When the investments were first made in November, 1986, Three Valleys entered into a standard client agreement with Hutton, which permitted the firm to trade on margin, Hansen said. But Hansen said a copy of the water district's investment policy, which prohibits "speculative" investments, was attached to the agreement.

"Our (investment policy) amendment would supersede anything that was stamped out in a standard agreement form," Hansen said.

After being informed that Hutton was trading on margin, Three Valleys sent the firm a letter reiterating its investment policy and ordering that margin trading cease immediately, Hansen said.

Hansen argued that even if he had approved margin trading, Hutton had a legal responsibility not to use public funds for such speculative investments.

Three Valleys Municipal Water District is a public agency that serves as a water broker, importing water from Northern California and the Colorado River to supplement water supplies for customers in Pomona, Walnut, Rowland Heights, Diamond Bar, Glendora, San Dimas, La Verne, Claremont and parts of Covina, West Covina and Industry.

The district receives money through water fees, property taxes and interest on its investment holdings. The district, governed by a board of five elected directors, currently has reserves of $11.6 million, Hansen said.

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