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Citron Says He Did Not Calculate Risks : Orange County: Apologizing for crisis, he tells Senate panel he relied too much on professional advice. But Merrill broker says ex-treasurer called the shots.


SACRAMENTO — Portraying himself as an unsophisticated financial neophyte who relied too heavily on the advice of others, former Orange County Treasurer Robert L. Citron offered a public apology Tuesday before a special state Senate committee, declaring that the county's financial crisis is a burden he will carry "the rest of my life."

Citron--at times appearing nervous and hesitant but defending his performance over 24 years in office--said he had no contingency plan to handle the sort of investment meltdown that prompted the county to file for bankruptcy protection last month. Indeed, Citron asserted that he never had analyzed what would happen if interest rates rose or investors pulled their money out of the county's investment fund.

"I was so sure of what I was doing based upon the many years of success," Citron, 69, told the members of the Senate's Special Committee on Local Government Investments. "In retrospect, I find that I was not the sophisticated treasurer I thought I was."

Citron joined a parade of elected leaders, investors, auditors and brokers to the witness chair--almost all of whom sought to shift blame for the financial debacle to others, including Citron, county supervisors and the Merrill Lynch investment house.

Noting that he never obtained a college degree and had little formal training in government finance, Citron said he learned about some of the risky investments he pursued while on the job.

His assistant, Matthew R. Raabe, said he likewise did not have a clear understanding of the workings of the investment fund that the treasurer's office managed for the county and 186 school districts, cities and other agencies and was not aware of how swiftly it could collapse.

"I did not, for instance, understand how quickly and to what extent the structuring of individual securities would affect the portfolio as interest rates continued to increase," Raabe said. "I have come to realize in the past 2 1/2 months that those of us who are untrained in the complicated and somewhat bizarre aspects of derivatives and government agency securities cannot begin to suggest how to regulate their use."

The fund lost over $2 billion last year as Citron's highly leveraged investments in securities sensitive to interest rates tumbled in value while the Federal Reserve Board was raising rates six times.

Raabe, who became Citron's assistant in March, 1993, bristled at suggestions that he encouraged any entity to invest in the fund or helped direct its investments.

"I was not the person who defined the investment strategy or made investment decisions," Raabe said.

Citron also pointed a finger at others--especially Merrill Lynch, the brokerage that sold the county about 70% of the securities in its portfolio.

"I relied on the expert advice of financial professionals," Citron said. "In retrospect, it is clear that I followed the wrong course."

In particular, he dealt almost daily with Merrill broker Michael G. Stamenson, who also testified. Both men are under investigation by the Securities and Exchange Commission, and the debacle is the subject of numerous other state and federal probes.

Though Citron was describing Merrill Lynch as the county's de facto "financial adviser," officials of the firm said Citron made all decisions related to investments.

Stamenson expressed regret at the county's loss, but said Merrill was not at fault.

"Neither I, nor anyone else at Merrill Lynch, designed or structured the county's investment strategy or controlled the county's investments. Mr. Citron did," Stamenson said. "One thing should be clear--Bob Citron controlled the Orange County portfolio. Merrill Lynch did not. I did not."

The county sued Merrill Lynch last week, seeking $2.4 billion in damages and alleging that the firm lured Citron into exotic investments that broke state law and pushed the county into collapse.

Testifying at opposite ends of a long day, Stamenson and Citron formed mirror-image bookends, offering opposite perspectives on many key issues.

During more than an hour of questions and answers, Stamenson described Citron as a "sophisticated, experienced and knowledgeable" investor and said neither he nor his firm ever acted as a financial adviser to Orange County.

Countering Citron's argument that Stamenson led the former treasurer into risky investments, such as reverse repurchase agreements, Stamenson said he had learned much from Citron, adding, "He was doing reverse repos before I even knew what the term meant."

Stamenson flatly denied the suggestion by Citron, and other county officials, that Merrill Lynch served as an architect of the investment strategy.

"I had absolutely no input, at all, in the investment strategy," Stamenson testified. "I did talk to Mr. Citron every day. . . . Mr. Citron had direct relationships with every major institution on Wall Street."

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