Former Orange County Treasurer-Tax Collector Robert L. Citron violated trust relationships with participants in the county investment pool by skimming their interest earnings and burdening them with the costs of his failed investment gambles, according to a state auditor's report released Tuesday.
In a critical final report on Orange County's fiscal meltdown, State Auditor Kurt R. Sjoberg said Citron placed pool investors at unnecessary risk with his "imprudent and reckless" attempts to boost earnings with some of the most exotic securities offered by Wall Street.
The report, commissioned by Gov. Pete Wilson shortly after the county declared bankruptcy, does not provide any startling new insights into the crisis. But it does trace the nearly geometric escalation of Citron's high-risk investments, starting in 1991 and peaking in the spring of 1994.
The 56-page report also calls for limits on the power of treasurers statewide to engage in the sort of risky investment strategies that caused the pool to lose $1.69 billion, forcing the county's Dec. 6 bankruptcy.
Sjoberg recommends that the state prohibit outright the ability of counties, cities, schools and others to issue taxable or non-taxable debt purely to speculate in the market in hopes of making more money.
The report, the third issued by Sjoberg's office, found that:
* Between April, 1993, and June, 1994, Citron, or someone in his office, altered accounting records to siphon $93 million in interest income due other pool investors to the county.
* Citron transferred $271 million in losses to the entire pool after his bets with county-owned securities went bad.
* Citron guaranteed certain school districts their investments wouldn't lose money--and when they did he transferred the $27-million loss suffered by the schools' investments to the entire pool.
* Auditor-Controller Steve E. Lewis improperly transferred $73 million in restricted funds into the county's general fund six days after the bankruptcy filing in violation of two Board of Supervisors resolutions.
* The county will spend $24 million--double initial estimates--by June 30, 1995, on bankruptcy-related attorneys, financial advisers and investment bankers.
* The school districts, cities and special districts that deposited money in the pool automatically formed trust agreements with Citron, who violated those agreements, possibly opening the door to additional legal action.
In an interview, Sjoberg said his office did not find any evidence that Citron had been personally enriched in the years before the financial meltdown. But, he said, he and his team of auditors found the actions of Citron "unbelievable. It took some sort of ego."
Sjoberg said it appeared clear from Citron's special risk-free guarantees to some school districts--and one city--investing in the pool that "he needed to be recognized in some sort of capacity as special--to have them recognize him as a savior."
Sjoberg said auditors could not find any trigger event that might have prompted Citron to go on a high-risk investment binge, abandoning his oft-stated policy of emphasizing safety and liquidity over high returns.
An eerie chart in the report shows a dramatic shift in investment strategy in the past four years. In January, 1991, the portfolio included no investments in risky floating-rate notes. By November, 1994, the proportion of such notes in the portfolio had risen to 32%. During the same period, Citron's investment in low-risk U. S. Treasury securities fell from 11% to 2%.
Just before the bankruptcy, the report said, Citron had leveraged the $7.4-billion portfolio more than 2.7 times and invested more than 40% of it in risky securities highly sensitive to fluctuations in interest rates.
Investment experts hired by the auditor found that even a one-percentage-point increase in interest rates on Nov. 30, 1994, would have resulted in a $560-million loss to the portfolio.
Sjoberg said he was stunned at the "degree to which (Citron) was publicly stating he wasn't doing these things . . . when his practice was just the opposite."
The report said Citron's gambles with specific investments of behalf of the county's general fund were "even more dramatic." In January, 1994, the separate account for the county general fund was leveraged about 2,900% or 29 to 1.
Sjoberg said when Citron began to lose bets with these investments from September to November 1994, he transferred 54 securities with their $271-million loss to the entire pool.
But Sjoberg said Citron might find himself in the hottest water over the siphoning of interest earnings due all pool participants into a county account.
"The treasurer's office altered accounting records, which allowed the county's general fund to receive approximately $93 million more in interest earnings than it was entitled to," the report said.
Sjoberg said the audit of the county points to several changes that need to occur to protect public money.