MOORLACH UPDATE — Deputy Treasurer — April 7, 2010

I had the pleasure of spending Monday in the Orange County Superior Court.  I was subpoenaed by the attorneys for both the plaintiff (Shari Freidenrich) and the defendant (Keith Rodenhuis) in the case of Shari Freidenrich vs. Neal Kelley, Orange County Registrar of Voters.

Although I was there for the majority of the day, I was ultimately not requested to testify.  But, I had the pleasure of observing.  Please allow me to make a few observations.

There were three areas of concern.  First, is Keith Rodenhuis qualified to run for treasurer-tax collector?

Senate Bill 866 resulted from the Orange County bankruptcy filing.  For instance, it instituted a number of county treasurer oversight provisions, including the delegation of authority to invest.  From an historical standpoint, there may only be two county treasurers in this state, of whom I am aware, who have had their delegation to invest funds revoked by their respective Boards of Supervisors since the passage of SB 866 in 1995:  the county Treasurers of Yolo and Orange County.

For Monday’s deliberations, SB 866 also provides for the ability of the Board of Supervisors to require minimum eligibility standards for elected county treasurers.  Orange County has adopted these minimum standards.  You only have to meet one of the five standards to qualify for running for county treasurer.

Keith Rodenhuis said his law degree met one of these five standards.  Wrong.  It taught him corporate law, but it did not teach him finance, accounting or auditing.  In fact, the testimony provided during the case proved that he did not meet this qualification and the first article below is in error.  The defendant’s attorney did not assert this qualification in his closing arguments, and the Judge did not allude to it in her decision.

Keith Rodenhuis said his “three years” as a “Deputy Treasurer” qualified him under one of the other five standards, which reads as follows:

“The person has served in a senior financial management position in a county, city, or other public agency dealing with similar financial responsibilities for a continuous period of not less than three years, including but not limited to, treasurer, tax collector, auditor, auditor-controller, or the chief deputy or an assistant in those offices.”

I believe claiming that he is eligible under this provision is also wrong.  You need to be in a senior financial management position.  Serving as a department’s Public Information Officer does not make you a senior financial manager.  Being an assistant is too much of a stretch.  The Judge, however, found that the plaintiff did not meet her statutory burden of proving Keith Rodenhuis’ failure to meet this standard by clear and convincing evidence.

The second area of concern is the ballot title.  In this case the stretch continues.

Upon hiring, every employee in the Treasurer-Tax Collector’s department takes an oath of office and is deputized.  We do the same in the office of the Supervisors.  However, I do not refer to my staff as “Deputy Supervisors.”  I believe that referring to Keith Rodenhuis as a “Deputy Treasurer” is a misleading exaggeration.

The third area of concern was the current Treasurer-Tax Collector’s testimony as to the involvement that Keith Rodenhuis had in many of the so-called improvements within their department.  Allow me to provide paraphrases of Mr. Street’s testimony with some clarifications from my perspective.

“We received an award from NACO (National Association of Counties) for innovation.  We reduced our staffing from 108 to 82.”

Receiving an award from NACO is nice.   But claiming a twenty percent reduction in staffing?  I don’t believe there is a record to substantiate such a claim.

If you go to the County’s 2009-2010 Annual Budget (http://bos.ocgov.com/finance/2010FN/p4_frm.htm) and turn to page 382, you’ll find the “Ten Year Staffing Trend.”  In 2006 the Treasurer-Tax Collector department had 95 employees.  This current budget shows the department having 97 employees.  Who has the correct information on staffing reductions?  Street, NACO or the County’s Budget Office?

“We were the first county investment pool in the nation to receive the highest rating from Standard & Poor’s.”

That’s special.  But, it’s incomplete.  The county only received this rating on its money market pools, or some 60 percent of the funds under management.  There is no rating for the extended pool (some 40 percent of the funds under management). 

The county used to have the top ratings by Moody’s and Fitch for all of its Investment Pools (two money market pools and the extended pool).  That is no longer the case.  It’s interesting how one Structured Investment Vehicle (SIV) in the portfolio (Whistlejacket/Serpentine) can change things.

“We reduced our Net County Costs, the overhead burden.”

Really?  If you go back to the 2009-2010 Annual Budget, page 383, the net county costs (total requirements less total revenues) went up 81 percent in the last fiscal year!

What, then, is our current Treasurer-Tax Collector talking about?

In my twelve years as your county Treasurer-Tax Collector I almost annually requested the county’s CEO to include the district fees the county was earning from property tax collections go into the revenue budgets of the Assessor, Auditor-Controller, Treasurer-Tax Collector and Clerk of the Board.  This request was always denied and the fees were reported in the County’s General Fund revenues.  When I became a Supervisor, I requested the change again and this time the CEO concurred.  By including the new fees, the four department’s total revenues appeared to increase, thus reducing net county costs.  Chriss Street and Keith Rodenhuis were not responsible for this significant decrease in the net county costs in their department.  This last fiscal year, the CEO requested that we revert back to the old method of reporting the district fees income in the General Fund.  Not one Supervisor objected, including me.

The first article is from the Orange County Local News Network and it covers the Judge’s decision.

The judge ruled in favor of the Registrar.  Consequently, Keith Rodenhuis will not have a factually accurate job title on the ballot.  And his embellished ballot qualification statement will mislead many uninitiated voters.  This could have been avoided if the judge would have removed him entirely. Allowing a Treasurer to hire an inexperienced person for three years, and suddenly calling them qualified, makes a mockery of SB 866’s minimum qualifications.

The second article is in today’s OC Register and provides the latest in Treasurer-Tax Collector Chriss Street’s legal travails with the End of the Road Trust.  The article below is from the electronic “Watchdog” blog version.

Top deputy remains on ballot for county office

SANTA ANA — An Orange County Superior Court judge today rejected an attempt to remove a top deputy for outgoing Treasurer-Tax Collector Chriss Street from the June ballot.

Treasurer-Tax Collector candidate Shari L. Freidenrich sued to challenge the candidacy of rival Keith Rodenhuis, a top deputy and spokesman for Street.

Freidenrich, the Huntington Beach city treasurer, unsuccessfully argued that Rodenhuis did not meet the legal standards to run for the county office.

Orange County Superior Court Judge Glenda Sanders sided with Rodenhuis, who argued he meets both standards for the job. Rodenhuis is an attorney with a law degree focused on business law, so he meets the educational qualification, and he has been a senior financial manager for the Treasurer-Tax Collector for at least three years.

“I won on all counts,” Rodenhuis said. “This whole suit wasn’t about finding the truth, it was only ever about Shari trying to muscle me out of the race.”

Freidenrich countered that Sanders’ ruling “doesn’t really change anything. I believe I am the best-qualified candidate.”

Freidenrich’s attorney, Bruce Peotter, said he believed he could have won the lawsuit if he had more time to prepare the challenge, which was filed March 26.

“Time was our enemy, not the facts,” Peotter said.

Street testified Monday that he hired Rodenhuis to be his top deputy. Chief Assistant Treasurer Paul Gorman testified he is second-in-command, but acknowledged that Rodenhuis is a senior manager and top deputy, Peotter said.

Freidenrich said she receives Street’s monthly investment report, “But I have not seen Keith’s name on the letterhead for that report, which lists all the senior management, so, certainly based on the beliefs I have and others have, we went through this process.”

Freidenrich will not pursue her challenge, she said.

“The judge ruled and we move forth — end of subject,” Freidenrich said.

Street decided not to seek another term after a federal judge ruled he breached his fiduciary duty when he ran a trust before he was treasurer.

The other candidates are county assessor employee Patrick Desmond, who ran against Street in 2006; and Dave Lang, a certified public accountant and South Orange County Community College District trustee.

Freidenrich has the backing of Orange County Supervisor John Moorlach, who was the treasurer before Street.

Any candidate receiving more than 50 percent of the vote in the June 8 primary would win outright.

If no one gets more than half of the votes in the June 8 primary, there would be a showdown between the top-two finishers in the Nov. 2 general election.

Last month, the Orange County Board of Supervisors stripped Street of his investment authority because of the bankruptcy court ruling.

Chief Financial Officer Robert Franz will handle investment duties for Street, who will remain in office until Jan. 3 and continue to supervise his office’s other duties.

U.S. Bankruptcy Judge Richard M. Neiter ruled last month that Street breached his fiduciary duty during the time he controlled the End of the Road Trust, the assets of the bankrupt Fruehauf Trailer Corp., which Street oversaw for seven years.

Street was supposed to liquidate the assets, but instead acquired assets in an attempt to build a trucking empire he would lead, the judge ruled.

Neiter ordered him to pay more than $7 million in damages to the trust.

This story was written and edited by The City News Service.

Chriss Street appeals $7 million judgment

by Ronald Campbell

Orange County Treasurer-Tax Collector Chriss Street is appealing the $7 million fraud judgment that effectively ended his political career.

U.S. Bankruptcy Judge Richard M. Neiter ruled March 5 that Street breached his fiduciary duty as trustee of the End of the Road Trust from 1998 to mid-2005. In the wake of Neiter’s ruling, Street abandoned his re-election run and county supervisors stripped him of his power to invest public funds.  

Street’s successor as trustee, Los Angeles money manager Dan Harrow, has begun collecting on the judgment. He garnished 25 percent of Street’s salary and is seeking a court order to seize Street’s campaign treasury. Street loaned his campaign $100,000 at the end of 2009.

Street, represented by Irvine attorney James A. Hayes Jr.,  asked U.S. District Court Judge Dean D. Pregerson last week to reverse Neiter.   The potential grounds for the appeal include whether Neiter misapplied Delaware law on gross negligence and willful misconduct. In addition, Hayes questioned whether unspecified rulings by Neiter denied Street a fair trial. 

Street was forced out as trustee in August 2005. He became then-Treasurer John Moorlach’s top assistant and heir-apparent in January 2006 and was elected to a four-year term the following June. Moorlach turned against him in 2007.

As the court-appointed trustee Street was supposed to liquidate the remnants of the bankrupt Fruehauf Trailer Corp. He decided instead to revive the business, spending millions of the trust’s dollars in the process. Acting without supervision by the court or creditors, Street gave himself a pay raise and also spent tens of thousands of trust dollars on personal expenses, including stays at resort hotels, a $750 dinner at Spago and a $36 traffic ticket for his Ferrari.

During the two-day trial in February, Street testified he acquired two failing truck-manufacturing companies in an attempt to build up the trust’s lone operating company, a Mexican trailer manufacturer. He also testified that his position as head of the Mexican company entitled him to extensive benefits and essentially unlimited expenses.

In a harshly worded ruling, Neiter dismissed Street’s explanations as “absurd” and “inconceivable.”

FIVE-YEAR LOOK BACKS

April 6

2000

First, the public service announcement.  This five-year-old headline still applies today:  “Property levies due by Monday.”  Chris Reed of the OC Register was kind enough to print our biannual announcement.  Please be sure to pay your property taxes on time.

                The county is reminding property owners that the second installment of their property-tax bills must be postmarked no later than Monday to avoid late fees.

Treasurer John Moorlach recommends that payments be mailed by Friday to ensure an acceptable postmark.  For those who wait, however, Moorlach’s office has arranged for the Post Office branch at 3101 W. Sunflower Ave. in Santa Ana to accept tax payments for postmarks until midnight Monday.

                Payments can be made via credit card over the phone.  More information is available at www.oc.ca.gov/treas or (714)834-3411.

Sometimes employees disappoint you and allow their personal infirmities to cause them to make inappropriate decisions in the work place.  This gets more complicated when you’re in a department that handles a considerable amount of money.  Regretfully, I had two employees over the years as the County’s Treasurer-Tax Collector that were guilty of unlawful actions.

I share this sad news because many county employees read my updates.  There are two things for public employees to remember.   It’s one thing to abscond with an employer’s funds.  It’s another if that employer is a public agency; the penalties for taking taxpayer funds are more severe.  And, the press has a funny way of finding out.  Consequently, this LA Times piece by David Reyes, “Clerk Stole, Cashed Property Tax Checks,” was tough to see.  Which brings me to the third thing you should remember:  your actions reflect on the rest of the employees in your department.

The joy of having good internal controls is that we discovered improprieties early and nipped this employee’s activities at the bud.

A clerk in the county’s treasurer-tax collector’s office has been convicted of grand theft after sheriff’s investigators found a $60,000 agency check at his residence and evidence that he cashed two property tax checks for $400, officials announced Wednesday.

Michael C. Barela, 31, of Santa Ana, who worked in the county office for two years, was fired on Jan. 19, a day after his conviction, Treasurer-Tax Collector John M.W. Moorlach said. He delayed announcing the incident while his office made sure that Barela had acted alone and that the thefts were limited to the three checks.

Moorlach said the investigation began in November, when the office received complaints from two taxpayers that their checks had been altered and cashed. The agency’s name on one check for $26.54 was washed out chemically, and the amount was changed to $200. A second check, for $1,500, was cashed in the same manner, with the amount also changed to $200.

Moorlach said keeping the amounts low made the checks easier to cash.

Barela was placed on administrative leave during the investigation. In a search of Barela’s home, authorities found methamphetamines and a $60,000 check from Moorlach’s office payable to the U.S. Postal Service.

Moorlach said Barela was convicted of two felonies: theft of public funds and possession of methamphetamines for sale.

In January, after finding no other evidence of altered or stolen checks, Moorlach’s office mailed unpaid-tax notices to 36,000 people.

Chris Reed of the OC Register also covered the news in “County ends probe of theft.”

                Orange County Treasurer John Moorlach said Wednesday that an internal probe showed no additional missing checks following the conviction of a former employee of the Orange County Treasurer-Tax Collector’s Office for felony grand theft.

April 7

2005

There are some days you never forget.  April 7 of 2005 is one of them. 

I was on the phone with Michael B. Marois, now of Bloomberg News, and we were discussing a topic.  He interrupted the discussion by saying, “Governor Schwarzenegger just pulled his efforts to get pension reform on the ballot – it just flashed across my screen.”  I remember blurting out a very loud “Argh!”

Then I commented.  Later that afternoon it went out on this wire service under the title “Schwarzenegger Puts Off Push for Pension Reform Plan.”  I was the closer.

Later that year, Arnold would lose all four of the propositions he supported.  I still believe if he had left pension reform on the ballot, the results would have been different.  He may have had five victories and a legacy to brag about.

San Diego, for example, is facing a $1.3 billion shortfall in its pension fund and only has enough money to pay for two-thirds of the employee benefits it has promised.  The new city attorney is advocating bankruptcy as a way to renegotiate its agreements with labor unions, and federal regulators are investigating the city’s disclosures.

                Nearby Orange County ,which was forced to file for bankruptcy in 1994 after a bad bet on interest-rate derivatives, is facing a $1.5 billion bill for its pension costs in July.

                “It doesn’t help the troops when the general is always retreating or not making any advances,” said Orange County Treasurer John Moorlach, a Republican.  “So as someone in the trenches who sees pension reform as critical, this is a little frustrating.”

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