MOORLACH UPDATE — Robert L. “Bob’ Citron — January 18, 2013

Wednesday afternoon I flew up to Sacramento for meetings.  When I’m in the Capitol, I am usually fully-booked.  Consequently, it was difficult to return all of the reporter inquiries in a timely manner.

Wednesday evening, I left my cell phone in my briefcase during my dinner meeting.  After arriving at my hotel room, it rang, with a call from Tony Saavedra of the OC Register.  Tony does not usually call after 10 p.m.  My cell also informed me of a couple of other reporter calls that I missed.  “Was I aware that Mr. Citron had passed away?”  “No.”  “Can you verify that he did?”  I then contacted Rob Richardson of the OC CEO’s office, who confirmed that he had received an electronic notification of the news.  Consequently, I was able to confirm Citron’s passing and made it into yesterday’s OC Register article, the first piece below, which provided confirmation for the next two articles, KPCC and Bloomberg, that referred to the OC Register.

Today’s OC Register covers Citron like they did 18 years ago in the month of December, 1994, with numerous articles and side bar listings.  It brings back old memories.  The fourth article below is one of them and includes two of the side columns (one abbreviated).

You would likely be 36 years or older to remember the campaign of 1994, where I challenged long-term incumbent Robert L. “Bob” Citron, as a registered voter in the OC.  The race has since been documented in a long list of books.  Ever since the OC bankruptcy filing, Citron and I have been joined at the hip, so to speak.  If someone wrote about me, they would mention Citron, and vice versa.  I only remember having one brief conversation with Citron, even though we may have been in the same room at the same time on a few occasions, and it was after I was appointed Treasurer-Tax Collector.  He would not debate me in any public forum during the campaign – it was all handled (and well documented) through the newspaper articles that I provided you in the LOOK BACKS for 1999.  I also recently covered part of the campaign story in MOORLACH UPDATE — ORANGE COUNTIANA — A Journal of Local History — November 9, 2012.  For fun, in lieu of the LOOK BACKS, I’m providing my entire chapter in the most recent edition of Orange Countiana below.  It was actually written more than a decade ago, but provides the younger readers (those under the age of 36) the history behind the OC bankruptcy filing and the role of Robert L. “Bob” Citron.

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Robert Citron, treasurer behind O.C. bankruptcy, dies at 87

Robert L. Citron, the former Orange County tax collector who presided over the county’s investments when it went into bankruptcy in 1994, died Wednesday at St. Joseph’s Hospital in Orange, Orange County Supervisor John Moorlach said. He was 87.

Citron was a wizard of high finance, earning millions of extra dollars for local governments with exotic investment schemes that soared over most everyone’s head.

But in 1994, his investments went awry, and Orange County lost $1.64 billion, ushering county government into what was then the largest municipal bankruptcy in American history. Citron was forced to resign from the job that had defined him, and he fell into a deep depression.

In the devastation that followed, there was a startling revelation: Citron’s office had been diverting money from school districts to the county and keeping two sets of books. The one-time financial hero became a convicted felon at 71.

Citron was fined $100,000 and sentenced to one year in jail. He served his sentence at the jail commissary, processing orders for toothpaste and candy bars that came in from the inmates. He continued to collect his $92,900-a-year pension.

Citron was born in Los Angeles on April 14, 1925.

He ran for county tax collector in 1970 and won.

In 1973, the county decided to save money by merging the offices of tax collector and treasurer. It seemed a natural fit: The tax collector took in hundreds of millions of dollars; the treasurer’s office invested, accounted for and distributed the money.

Citron had no background in accounting or investing. He had never owned a single share of stock. But the offices were combined under his leadership nonetheless.

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Robert Citron, treasurer during Orange County’s bankruptcy, dead at 87

Ed Joyce with AP

Robert Citron, whose bad investments as Orange County treasurer forced the county into bankruptcy in 1994, has died. He was 87.

Citron died Wednesday after a heart attack, Orange County Supervisor John Moorlach told Orange County Register.

Citron made big bets on complicated investments that earned high yields but eventually caused $1.64 billion in losses. The county’s subsequent bankruptcy was, at the time, the largest municipal bankruptcy in U.S. history.

A grand jury investigation found that Citron had relied on a mail order astrologer and a psychic for interest rate predictions.

Citron pleaded guilty to six felony counts and was sentenced to day work sorting mail in the county jail.

Citron later testified in a county lawsuit against Merrill Lynch that the investment house settled for $400 million.

Citron was a wizard of high finance earning millions of extra dollars for local governments with exotic investment schemes that soared over most everyone’s head.

But in 1994, his investments went awry, and Orange County lost $1.64 billion, ushering county government into what was then the largest municipal bankruptcy in American history, according to the Orange County Register.

Citron was forced to resign from the job that had defined him, and he fell into a deep depression. In the devastation that followed, there was a startling revelation: Citron’s office had been diverting money from school districts to the county and keeping two sets of books. The one-time financial hero became a convicted felon at 71.

Citron was fined $100,000 and sentenced to one year in jail. He served his sentence at the jail commissary, processing orders for toothpaste and candy bars that came in from the inmates. He continued to collect his $92,900-a-year pension.

Citron was born in Los Angeles on April 14, 1925.

He ran for county Tax Collector in 1970 and won.

The Register said Citron had no background in accounting or investing. He had never owned a single share of stock. But the offices were combined under his leadership nonetheless.

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Robert Citron, Jailed for Orange County Failure, Dies at 87

By Laurence Arnold

Robert Citron, a former treasurer of California’s Orange County who spent nine months in prison for his role in what stood for years as the nation’s biggest municipal bankruptcy, has died. He was 87.

He died yesterday at St. Joseph Hospital in Orange, California, the Orange County Register reported, citing Orange County Supervisor John Moorlach.

Orange County, the nation’s fifth most-populous county and home of Walt Disney Co.’s Disneyland, sought protection from creditors in 1994 after Citron lost about $1.7 billion on derivative investments. The county emerged from 18 months of bankruptcy in June 1996.

That stood as the biggest county bankruptcy until 2011, when Jefferson County, Alabama, filed for protection after costs spiraled out of control on auction-rate securities and derivatives related to $3.1 billion of sewer-system debt.

Citron was long praised for the above-market returns –about 10 percent annually, and 17 percent in 1982 — that he earned on county investments. His strategy of borrowing money short-term to buy longer-maturity derivative securities was successful in 1992 and 1993 as interest rates dropped, and backfired in 1994 when rates surged.

Astrological Advice

He pleaded guilty to lying about conditions that led to losses in the county’s investment pool. The legal case revealed, among other things, that Citron had consulted a $4.50 star chart prepared by an Indianapolis astrologer to help guide his strategy for the county’s $20 billion investment pool. Citron said in court documents that he used the star chart for clues to upcoming market events — and that shortly after he ceased using the charts, his strategy collapsed.

He served about nine months of a one-year sentence in 1997, spending his time in a work-release program at the sheriff’s commissary, alphabetizing prisoner requests for deodorant, envelopes, candy bars and other items. He spent his nights and most weekends at home.

Fallout from the bankruptcy reached Wall Street.

Orange County sued Merrill Lynch & Co. for providing inappropriate investment advice, citing recommendations made to Citron by former Merrill bond salesman Michael Stamenson. Citron used money borrowed from Merrill and other firms for his interest-rate bets.

Financial Repercussions

Merrill, which was acquired in 2008 by Bank of America Corp. (BAC), settled with the county for $400 million in 1998. Morgan Stanley (MS) Dean Witter & Co., now called Morgan Stanley, agreed to pay $69.6 million. Nomura Securities International Inc., part of Nomura Holdings Inc., Japan’s biggest broker, agreed to pay $47.9 million. One year later, a dozen securities firms, including Smith Barney Inc. and PaineWebber, paid the county $20.8 million in a settlement.

Citron was born in 1925 in Los Angeles, a third-generation Californian, and grew up in Burbank, according to the Los Angeles Times. He served as the county’s treasurer and tax collector for 24 years after rising through the ranks of the treasury department.

To contact the reporters on this story: Laurence Arnold in Washington at larnold4@bloomberg.net

To contact the editor responsible for this story: Charles W. Stevens at cstevens@bloomberg.net

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Citron’s legacy: more scrutiny, tighter controls

By ANDREW GALVIN

SANTA ANA – Orange County’s government today is much changed from when Robert Citron was managing the county’s investment pool.

A series of legal settlements, changes in state law and decisions by the county’s Board of Supervisors have created safeguards and scrutiny on how the county manages its investments and borrows money.

For example, most county investments in derivatives – the complex securities that got Citron in hot water – were outlawed by the state after the county’s 1994 bankruptcy, said Bob Franz, the county’s interim CEO.

The Board of Supervisors has decreed that safety, liquidity and yield – in that order – are the goals of the county’s investment pool. As a result, the pool throws off far less cash today than it did in Citron’s risk-happy heyday.

State law also requires more oversight. The county audits the investment pool quarterly and annually to make sure it is being managed in compliance with the investment policy approved by the Board of Supervisors. There are software safeguards in place to make sure the county’s traders don’t stray from the policy when they purchase securities, which are mostly high-rated government notes, Franz said.

"We have better controls and we just don’t rely on some investment guru any more," said Supervisor John Moorlach, who challenged Citron for Treasurer-Tax Collector in 1994 and was appointed to succeed him the following year. "It’s all reality."

Another technique of Citron’s was to borrow money to increase the county’s investment bets. After the bankruptcy, the Securities and Exchange Commission ordered the county to cease and desist from such borrowings, an order that is still in place, Franz said.

Under the SEC order, the county can’t issue short-term debt if it has sufficient cash on hand. "The calculation that they require you to go through really makes a lot of sense," Franz said.

Under state law, the Board of Supervisors now has the ability to take investment authority away from the Treasurer-Tax Collector, something it did in 2010, when the board appointed Franz to oversee the pool in place of then-Treasurer Tax-Collector Chriss Street.

Although it has been reduced in recent years, another legacy of the bankruptcy – debt – hasn’t gone away. The county still owes about $174 million in bankruptcy-related debt. It’s due to be paid off in 2017.

Contact the writer: agalvin@ocregister.com

Citron timeline

April 14, 1925: Robert L. Citron is born.

1960: Citron is hired as deputy tax collector for Orange County.

1970: Citron is elected tax collector. Three years later, he becomes treasurer as well when the jobs are combined.

1979: Citron champions a law letting treasurers invest with borrowed money, a technique known as leveraging.

1981: Citron’s fund nets a 17.7 percent yield in the second half of the year. His reputation as a top-earning treasurer blossoms.

July 1991: Looking to make up for shrinking tax revenue due to the recession and Prop. 13, Citron tries to make up the shortfall by boosting interest earnings. He borrows heavily to invest, betting that interest rates will drop. He eventually controls a $20 billion investment pool with money from schools, cities, special districts and the county.

April 1993: Citron begins diverting $80 million in interest from cities and schools to the ailing county. To cover up the diversion, he creates phony interest-rate reports.

February 1994: The Federal Reserve begins sharply raising interest rates, undercutting Citron’s investment strategy.

Spring 1994: Costa Mesa CPA John Moorlach challenges Citron for re-election, saying Citron is taking big risks with his investments. County officials back Citron, who easily wins.

Fall 1994: Rising interest rates batter Citron’s investments, but he refuses to change his strategy. He transfers money-losing securities from the county’s account to the pool, secretly saddling other governments with $271 million in losses.

Dec. 4, 1994: County staffers force Citron to resign.

Dec. 6, 1994: County files for bankruptcy protection under Chapter 9 for itself and the investment pool.

Jan. 20, 1995: Accountants discover the fund diversion. Assistant Treasurer Matt Raabe is placed on leave, and the district attorney and the Securities and Exchange Commission launch investigations. The diversion is announced to the public the next day.

April 27, 1995: Citron pleads guilty to six felonies related to the fund diversion.

June 1996: County emerges from bankruptcy, selling $882 million in bonds to repay bankruptcy bills. It fully repays cities, schools and special districts that gambled by borrowing money to invest in Citron’s fund.

Nov. 19, 1996: Citron is sentenced to one year in jail and a $100,000 fine. He serves in a sheriff’s work program each day and goes home each night.

July 1998: Documents made public show that Citron said he was increasingly unable to make correct decisions or properly recognize numbers during the county’s financial crisis due to a “cognitive deficit.”

– Michael Doss, director of Register News Research

Other key figures

John M. W. Moorlach

Roger Stanton, William Steiner, Gaddi Vasquez

Steve Lewis

Michael Capizzi

Matthew Raabe

Ronald S. Rubino

Ernie Schneider

William Popejoy

Jan Mittermeier

Michael Stamenson

ORANGE COUNTIANA

The Orange County Bankruptcy

John M.W. Moorlach

MEGO – My Eyes Glaze Over

Misinterpretation. There are occasions where something will occur, the magnitude of which is not quickly apparent to you. What you hear or see doesn’t quite resonate, or register. You may find it preposterous and drop the subject. You may ask questions and nibble around the edges. The answers may be patronizing, but they pacify your immediate concerns.

Preoccupation. You may just be too busy with minor issues that you do not have time for major ones. You may just be too important to be irritated by some matters. Besides, financial discussions make your eyes glaze over.

Obfuscation. You believe your sources are trustworthy. You have heard enough and come to what you believe is the correct conclusion. It’s not. In fact, you’re completely wrong, even though you’re convinced that you understand the facts correctly.

Revelation. Then an astonishing new disclosure or brainstorm hits you, and the true issues suddenly become clear. “Oh, that’s what that meant; how did I miss something so obvious?”

Chapter 9 of the Bankruptcy Code

In 1994, the County of Orange went through one of those “why didn’t we see it coming” experiences. This is a tale of human failure that resulted from misinterpreting the gravity of an investment method, how it occurred, and what has been implemented to be sure that it does not happen again. And since I had the distinction of enjoying a front-row seat, let me provide a brief summary of this internationally reverberating event.

On December 6, 1994, the County of Orange filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code. This rare and dramatic action resulted from an improper and failing investment strategy of public funds perpetrated by County Treasurer-Tax Collector Robert L. “Bob” Citron. It was the largest municipal bankruptcy filing up to that time in world history.

The initial news and subsequent related articles would command front page headlines in the local newspapers for a period of time not seen since World War II. This financial earthquake, generating a loss in excess of $1.6 billion, is probably the most significant event of Orange County’s 120-plus year history.

Orange County was a substantial municipality, with a population exceeding that of twenty states. In an age of instant global communication, the announcement of one of the world’s wealthiest counties filing for bankruptcy protection became universally known. When Orange County was mentioned around the U.S., people were more likely to mention the bankruptcy than Disneyland. And the stigma still lingers. It now seems that one cannot read a municipal finance or derivative-related article without some mention of Orange County. Regretfully, this will be attached to our formerly pristine reputation for decades to come.

Professional Malpractice and Gross Negligence

How did this financial calamity happen? And why, in spite of my own well-publicized warnings, did we “fail to see it coming”? Or as one County Supervisor observed, “Is this what John Moorlach was talking about?” Why the misinterpretation.

The answer is simple. The bankruptcy occurred due to professional malpractice and gross negligence in basic financial stewardship. It was not some grand conspiracy committed through collusion by a number of interrelated parties. Our bankruptcy was a colossal accumulation of unnecessary errors and irresponsible actions done independently by a significant number of individuals from various financial and public sector disciplines, both inside and outside of county government, all of whom should have known better.

The Orange County bankruptcy is also a story of too many fine people being blinded to the facts. During my candidacy for Treasurer-Tax Collector against Bob Citron, from February to June, 1994, I tried to communicate the concerns facing the county. But nearly everyone who knew Citron instinctively came to his defense, without doing any serious research on his investment portfolio. This included the county’s leadership, its paid professionals, our municipal treasurers, those who voted for Citron in his successful reelection campaign, and the third arm of government, the press.

Why should anyone worry when a candidate comments on a $21 billion tumor on the county’s balance sheet? After all, Standard & Poor’s and Moody’s were publically opining that all was well with the county’s investment pool. The international accounting firm of KPMG Peat Marwick, auditors for the county and for other local government bodies which represented almost two-thirds of the total pool, were comforting and reassuring their clients about its efficacy. It was the government, after all; surely our investments were safe. And besides, if something was really wrong, the newspapers would have figured it out, right? Of course there was nothing wrong. Our professionals wouldn’t blunder this badly, would they?

As to the gravity of the failure by the financial advisors serving the county, the proof is in the substantial financial settlements that have occurred as a result of the county’s lawsuit filings. Within five years, we had already garnered more than $800 million in negotiated settlements, with other cases still pending.

Some people damaged us. We endured the suffering. We have recovered. It is behind us. But we should not forget how we got here.

There are two key points to keep in mind: The county was not “bankrupt.” It only filed for bankruptcy protection. And it exited bankruptcy protection within 18 short months.

We did not cower from the challenges. They were met head on in earnest. Certainly mistakes were made, but that can happen to anyone when they struggled through difficult and uncharted territory. But with a focus on conclusion and recuperation this episode in the county’s life has a happy ending.

The Primary Perpetrators

Perhaps the cause of the bankruptcy can best by understood by reviewing the actions of its key players who were at “ground zero.”

We must start with former County Treasurer Robert Citron and his ill-fated investment strategy. It consisted of three unique and converging components. The first was the rise and fall of interest rates. Around the beginning of the 1980s, interest rates spiked up dramatically, peaking on September 30, 1