MOORLACH UPDATE — I-405 Hearing — July 24, 2013

The Orange County Transportation Authority (OCTA) Board voted for Alternative 1 last fall. Alternative 1 builds one lane on each side of the San Diego Freeway, just as Measure M2 requires. The vote, called the Locally Preferred Alternative (LPA), was to go to Caltrans for their concurrence. However, with the Federal government’s MAP-21, and its carpool lane degradation study requirements, Caltrans has been signaling loud and clear that high occupancy vehicle (HOV) lanes would be converted to high occupancy/toll (HOT) lanes (see MOORLACH UPDATE — Car Pool Trip Wire — July 16, 2013). Consequently, the signals that were being telegraphed by Caltrans are something like this: The LPA approved by OCTA’s Board does not mesh with the new (approved by Congress last July) Federal requirements; therefore, we’re only approving HOT lanes. Consequently, it won’t matter how the OCTA Board voted, we (Caltrans) will preempt that decision.

On the road to the Caltrans decision comes the request by the city of Long Beach for more environmental impact report (EIR) analysis. With a six-month delay, there was an opportunity to have the OCTA Board review the approval of only adding one lane per side, when the sixteen impacted bridges will be reconstructed to accommodate the addition of two lanes per side. Why force the neighboring cities to endure construction activity twice, when the lanes can be paved once? And the cost for the second lane was manageable under the current budget forecasts. The OCTA Board had just seen a turnover of a majority of its members (ten of the nineteen) and the previous Board had the appearance of having rushed its vote. With the additional time for Long Beach’s review, it provided an opportunity to reconsider the addition of the second lane. It also allowed another Board member to recommend reviewing the conversion of the current HOV lane into an HOT lane. But, as Caltrans had been messaging this as the likely scenario anyway, opening the discussion had no apparent downside. The upside is that the current Board can discuss and consider the new circumstances (MAP-21, Long Beach Supplemental EIR), and potential modifications (concepts being studied), and make its recommendation to Caltrans.

The public hearing is tonight. The bonus item below provides the details. If this matter is of importance to you, then you can enjoy the hearing and participate by sharing your thoughts and concerns. The Los Alamitos-Seal Beach Patch provides the subject in the first piece below.

The most significant item on yesterday’s Board of Supervisors agenda was continued. I found out minutes before the meeting and was not given a reason for the delay. Consequently, not knowing the details, I expressed some frustration on the matter during the Board Comments segment of the agenda. If one or more of my colleagues are uncomfortable with Xerox, then let’s start negotiations with the second lowest and most responsible bidder, before we lose more time in the process. My venting is provided in the Voice of OC, which is the second piece below.

BONUS: Public Hearing Planned On Additional I-405 Traffic Study (see

Proposed 405 Toll Road Drives Opposition

As OCTA hosts a community meeting to discuss proposals for expanding the 405 Wednesday, city leaders around northwest Orange County attempt to stir opposition.

Posted by Paige Austin (Editor),

By Jessica Carreir

To many, the Orange County Transportation Authority’s decision to reconsider adding toll roads to the 405 Freeway came as a surprise – mainly because the agency’s board shot down the plan last year following public outcry from city leaders throughout northwest Orange County.

But following an exodus of OCTA board members, the proposal is back on the table along with options for simply adding general or carpool lanes to the freeway. Now city leaders from Seal Beach and Los Alamitos to Fountain Valley and Costa Mesa are scrambling to mount oppositions to the proposed toll road by the Aug. 12 deadline to comment on the project’s Supplemental Draft Environmental Impact Report/Environmental Impact Statement.

Rebuffed in its request for an extension, the Rossmoor Community Services District voted Monday to oppose the High Occupancy Toll roads and denounce Caltrans for failing to extend the deadline.

“The insensitivity of Caltrans and by extension, the motives of the OCTA Board of Directors to ‘bait and switch’ their position on HOT lanes does not pass the smell test,” said RSCD Board President Michael Maynard.

Caltrans and OCTA are currently looking at three alternatives for expanding the 405 in northwest Orange County. The first alternative, which was previously chosen by the OCTA board, would add one general purpose lane to either side of the 405 between Euclid Street and the 605. The second alternative permits the addition of two general purpose lanes in both directions from Euclid Street to the 605. And the third alternative allows for one general purpose lane in both directions, and one HOT lane in both directions.

According to the Supplemental EIR/EIS Draft, HOT lanes would take the place of regular carpool lanes. Drivers would still need at least one passenger to use these lanes, but cars with two people would incur the regular toll while cars with three or more would be free or discounted.

This is a point of concern for citizens who currently carpool on the 405. “[The OCTA] thinks [HOT lanes are] an opportunity for people to carpool and pay for the use,” explained Seal Beach Councilman Mike Levitt. “But people are used to it [being free] now.”

“I represent most of the seniors in Seal Beach. I represent Leisure World,” said Levitt. “Many of them are on social security. They’ve already paid for the 405 with their taxes. And when they go shopping in South County, they get a relative or a friend and they hop in the HOV (high occupancy vehicle) lane.”

Levitt worries about how the toll lanes will effect his citizen’s ability to quickly get around the county. He’s not the only one.

“I don’t want to see people paying for something in the future that I could take a stand against now,” said Fountain Valley councilman Michael Vo. “I don’t want to see the West Coast, especially California, end up like the East Coast where people have to stop every 5 or 10 miles to pay for road use.”

Vo worries that instituting toll lanes, like the kind installed in Los Angeles on the 110, could cause a troublesome trend.

The issue appeared resolved in October when the 16-member board at the OCTA voted 12-4 against the toll lanes and opted instead to add one general purpose lane to either side of the 405 freeway.

However, in April, the City of Long Beach submitted comments to the OCTA regarding certain intersections in their city that might be negatively effected as a result of the project outlined by the EIR/EIS report. For the OCTA, it provided an opportunity to reopen all options of the 405 expansion project—including the discussion on HOT lanes.

A Supplemental EIR/EIS Draft was issued in June.

Like many others, Los Alamitos Councilman Richard Murphy was caught off-guard by the Supplemental Draft. With only 45 days for public comment ending on August 12, Murphy feels like there’s less time to lobby against the issue this time around.

“They also extended the deadline last time, if I remember correctly,” said Murphy.

The previous draft’s period for public comment was extended by 15 days.

“And if you notice, even with our own Land Use Plan, we delayed it a month just to be sure that our residents could see it,” said Murphy. It seems to be the opposite is happening here.”

According to the Supplemental EIR/EIS Draft, construction on the project would begin in 2015 and finish in 2020. The first build alternative proposed would take the least construction time, with an estimated 48 months. While the third alternative, which includes HOT lanes, would take 54 months.

During the project’s opening year in 2020, the intersections Long Beach officials were concerned with in their initial comments to the OCTA would be least effected by the first alternative and most effected by the second, according to the report.

“They’re trying to get [HOT lanes] back by using Long Beach as an excuse,” said Seal Beach’s Levitt.

Levitt, who works on the Orange County Vector Control board with County Supervisor, and OCTA board member, John Moorlach, reminded Moorlach of his stance on HOT lanes at a recent Vector Control meeting. The Los Alamitos City Council also voted last Monday to send Moorlach a letter stating their position against HOT lanes.

Representatives at the OCTA could not be reached for comment, but they will be holding a public hearing Wednesday, July 24, from 6-8 p.m. at Hill Middle School in Long Beach.

Supervisors Postpone Vote on Giant Xerox Contract


Xerox’s efforts to win a massive, $134-million county computer contract were dealt a setback Tuesday, amid questions about a $27-million price hike to the contract – even before it’s approved.

Orange County supervisors decided not to vote on the contract Tuesday, instead postponing it to July 30.

While county leaders didn’t explain the delay, board Chairman Shawn Nelson spoke of Xerox having “problems.”

The postponement came as Voice of OC reported early Tuesday that Xerox’s price had jumped by nearly $27 million after it was chosen as the preferred vendor, with scant details from county staff.

County IT staff said that about $12 million of that increase was added by Xerox itself, despite a company executive reassuring supervisors last November that Xerox would stick by its $107-million final offer.

Faced with Xerox’s price shooting up after it was chosen over its competitor Verizon, Supervisor John Moorlach asked on Tuesday if Verizon should re-bid on the contract.

“I’m just wondering if we should be encouraging IT staff to look at discussions with Verizon to see if their bid is any different,” said Moorlach.

The idea would be to “see if the delta has changed a bit and see if we’ve got a little bit more competition in the mix,” he added.

Chairman Shawn Nelson, meanwhile, said the gulf between Xerox’s $134-million bid and Verizon’s $171 million offer is still far too large.

“I assure you, my issue is more to do with Xerox and their issues than an additional $37.5 million that Verizon bid,” said Nelson, saying Verizon would need to drastically reduce its price if it wanted to be a viable candidate.

“I made it very clear, having spoken with [Verizon] yesterday, that…at least if it wasn’t a $37.5 million shave from where they started, it was sort of a non-starter,” he added.

Moorlach had also suggested holding off on the vote until August when Supervisor Todd Spitzer can attend.

Nelson, meanwhile, pointed out that the current Xerox contract expires at the end of the month, so the board would need to discuss an extension at the July 30 meeting.

In an interview later on Tuesday, Moorlach agreed with Nelson that Verizon has a huge gap to overcome.

“I think [Chairman] Nelson’s response is probably pretty accurate. [Verizon] might not come down” in cost, said Moorlach.

Asked if Xerox had broken its guarantee to stick with its price, Moorlach said: “I’d rather reserve my comments.”

Back in November, when Xerox was chosen as the preferred vendor, supervisors had showed a sharp concern about computer companies underbidding contracts only to bump up the price later on.

“If you’re low balling us, we’re not going to take too kindly to it,” Supervisor Janet Nguyen told bidders.

Xerox’s representative was unequivocal.

“There have clearly been questions about the price. So, let me say without any question, we will guarantee that we will deliver the service we’ve offered in our proposal for the price we quoted,” said Michael Davis, senior vice president at Xerox State and Local Solutions.

At that point, both Xerox and Verizon had submitted “best and final offers” upon which they were evaluated.

But after Xerox was chosen as the preferred vendor, the company added $12.1 million to its price for extra services that are still unclear. County staff also added a further $14.8 million in costs, according to staff documents.

It’s nearly impossible to evaluate the price jump – county staff’s entire explanation of Xerox’s added costs attributes them to “governance, extended transition schedule, responsibility for all transformed circuits, performance of subcontractors.”

Moorlach said that while he hasn’t delved into the details of the increase, he’s comfortable with staff’s recommendation to approve it.

“I didn’t have a problem with it, and I wasn’t going to make an issue of it,” said Moorlach.

Xerox spokesman Carl Langsenkamp said Tuesday evening that he wasn’t familiar with the proposed contract but would research the issue.

The new Xerox contract would have the firm running the data network for nearly all of the county’s 17,000 desktop computers as well as the county’s land line phone system.

The large-scale computer contract comes amid concerns that many IT vendors intentionally lowball their bids and then, once they win a contract, tack on overpriced change orders.

Such a scheme is alleged by the county in a recent fraud lawsuit against computer vendor Tata Consultancy Services.

TCS made “a series of false promises and intentional misrepresentations” during the bidding process and “made promises to complete the project on a budget and according to a timeline with which they had no intention of complying,” county lawyers allege in the suit.

“The county has suffered millions of dollars of damages as a result of defendants’ wrongful conduct, and it will continue to suffer damages for the years it will take to develop a replacement for the failed project,” they added.

Xerox’s current contract dates back to 2000 and was the subject of a series of critical audits, which led to the forced retirement of former IT director Satish Ajmani.

The deal was originally supposed to end in June 2011, but has been repeatedly extended as efforts drag on to choose replacement vendors.

That process has taken more than three-and-a-half years, dating back to February 2010 when county staff started developing the request for proposals.

Xerox and its lobbyists have steered considerable sums to all five county supervisors, often times in a less-than-obvious way.

A quick survey of campaign finance data found more than $12,000 in contributions between mid-2010 and mid-2012, though much of the funding is obscured through intermediaries.

You can reach Nick Gerda at ngerda, and follow him on Twitter: @nicholasgerda.


July 20


The Long Beach Press-Telegram had supportive editorial with “Safeguarding the treasury – Supervisor Moorlach leads a pension reform that could have wide benefit.”

Orange County Board of Supervisors Chairman John Moorlach, a rarity among politicians, continues to confront the public pension mess head on. His latest effort is to let voters stand in the way of any future increases.

That’s like locking the barn door after the horses are gone. But experience makes it clear, when it comes to government pensions there can’t be too many safeguards.

Moorlach will take his plan to the Board of Supervisors July 29. If his colleagues approve it, and they should, there will never be another pension debacle unless voters become completely catatonic.

The measure requires two things. First, it forbids the supervisors to approve any pension enhancements other than cost-of-living adjustments without approval of voters. Second, it requires an actuarial study of the liability created by any increase.

Orange County’s pension liabilities, like those of counties and cities throughout California, have swollen enormously. The county’s pension program had been fully funded until a previous board (made up of supposedly conservative Republicans) spiked it in 2001 and 2004, and now it is only 71 percent funded.

That translates to debt of well over $2 billion, and, worse, it has risen further because the return on investments in the pension funds has fallen, more employees are retiring than expected and retired employees are living longer than expected.

Moorlach’s ballot measure wouldn’t fix all of that. But he has another remedy.

Thanks to Moorlach’s prodding, Orange County has filed a lawsuit that has the attention of government bureaucrats everywhere. The suit maintains, with real credibility, that because Orange County applied the 50 percent increases in sheriff’s deputies’ pensions retroactively they were an illegal gift of public funds, and because this created an unfunded liability it violated the state constitution’s ban on deficit spending.

The employee unions are defending the increases on the ground that the agreement is a contract that can’t be set aside. Unless, of course, the contract was illegal.

Moorlach, whose 2nd District includes the West Orange County communities of Seal Beach, Rossmoor, Los Alamitos, La Palma and Cypress, is taking some bold stands, considering how much influence public-employee unions have in electing politicians who are willing to enrich their pay and benefits. If he and his board colleagues prevail, they will have put some locks on the public treasury.

Now hide the keys.

July 21


Addressing the compensation package of electeds has been a difficult task for Orange County for some time. David Parrish of the OC Register provided a unique story with “Clerk-recorder rated top O.C. official – GOVERNMENT: First-ever grading by supervisors gives low marks to district attorney and assessor.” Supervisor Spitzer refused to participate in the ratings, “saying the process was hopelessly flawed and should not have been done behind closed doors.” Scores: Clerk-Recorder Granville – 4.25; Sheriff-Coroner Gates – 4.0; Treasurer-Tax Collector Moorlach – 4.0; Public Administrator Baker – 3.0; Auditor-Controller Steve E. Lewis – 2.75; District Attorney Capizzi – 2.38; Assessor Jacobs – 1.75. Here are the four opening and a few middle paragraphs:

Orange County Clerk-Recorder Gary Granville has been doing a better job than either Sheriff Brad Gates or Treasurer John Moorlach – at least in the eyes of the Board of Supervisors, which recently rated their job performances.

Assessor Brad Jacobs and District Attorney Michael Capizzi received the lowest ratings among elected officials.

In fact, Capizzi’s job performance was held in such low regard that he received a zero rating from Supervisor Bill Steiner – a mark even beneath the grading scale of one to five being used.

For the first time, supervisors last month rated the seven other elected county officials as part of an evaluation process to determine annual pay raises. Supervisors are required by state law to not only set their own pay, which they bumped 12 percent over the next two years, but also that of the other elected officers.

On the other end of the scoring was the high rating going to Granville, considered an efficient and innovative manager who also is well-liked. What was surprising was that his average rating, 4.25, was higher than the ones for both Gates and Moorlach. Each received an average rating of 4.0.

Gates, who is retiring in January after more than two decades in office, has long been viewed as Orange County’s most respected public figure – if not the county’s most powerful politician.

Moorlach has been given high praise for his stabilization of the Treasurer’s Office in the wake of the bankruptcy. He also will forever be known as the lone person to warn the county of the pending financial disaster, which he did while a candidate.


Stuart Pfeifer of the LA Times provided a review in “Once Bankrupt, O.C. Now Balloons – The 1994 debacle put the county on a crash diet, but spending is the most ever, scaring key leaders.” It again reflects that addressing total compensation is a weakness that still needs to addressed. Ten years ago I provided a very strong warning, so I’m including this piece in full, with the admonition that termites were coming into the building and no one is spraying them. It was a metaphor of a crumbling structure, which is now affecting nearly every city, county and state in our nation, with the city of Detroit as just another reminder of the poor stewardship infestation (so to speak).

After it declared bankruptcy nearly nine years ago, Orange County tried to become a more efficient machine. Supervisors slashed payroll, placed restrictions on county investments and developed a plan to ensure that the county never again exposes itself to financial ruin.

But in the years since, county government has grown even bigger, spending has escalated and perks awarded county workers have soared.

The county has increased its work force year after year, to where it now employs 28% more people than it did the year of drastic cuts that followed the bankruptcy, 1995-96. In contrast, the county’s population grew 15% over the same period.

In eight years since the bankruptcy-triggered spending cuts through the fiscal year just ended, the county’s budget has risen 42% — about double what the rate of inflation required to keep spending flat. If spending continues at its current pace, the county will run out of savings in two years.

Now, some on the county Board of Supervisors are growing concerned, because of the greater spending and because a significant portion of the state’s budget problems will probably be passed along to the counties this year and perhaps for years to come.

"My perception is the county went through a severe belt-tightening after the bankruptcy. Finally, near the end of the ’90s, they started loosening the belt," said Supervisor Bill Campbell, who took office this year. "They were in a strong economic time when they felt justified doing that. Times are different now. We are in a flat economy. The state is in an economic disaster. So we have to go back and look at where we loosened the belt the last three years, and tighten it."

One example of the looser spending is the car allowances given to top- and mid-level managers in 26 departments. In four years, the allowances leaped 43% to more than $670,000.

Many of those managers receive more than $125,000 in annual salary and the added "auto allowance" of $7,000 to $8,000 per year. In the district attorney’s and public defender’s offices, some 47 managers received car allowances totaling more than $300,000 in the last year, records show.

"That’s a perfect example of an area that’s growing," Campbell said. "When you see that kind of growth going on, it’s a sign there’s something strange going on."

Campbell said he would consider asking his colleagues on the board to limit future car allowances to managers who rely on their cars for county service.

Some costs have been for one-time occurrences.

When the Board of Supervisors this year fired Executive Officer Michael Schumacher, he received a contractually required $230,000 severance. Adding to that his salary, car allowance and 401(a) retirement benefit, Schumacher got $356,256 his last year of county employment.

The Orange County Grand Jury recently criticized the county for issuing generous benefit increases to more than 17,000 county employees represented by unions. Among those benefits: a 2% bonus for top-performing workers that actually is given to more than 95% of the county’s workers, costing about $15 million per year.

Applying Pressure

County Supervisor Chris Norby is opposing every contract that, as in the past, allows county agencies to spend 10% above the contracted amount without the board’s approval. The board is promising to reconsider the employee bonus program and has publicly criticized the county’s personnel department for allowing managers to suspend county workers with pay for long periods during disciplinary investigations. That practice has cost the county thousands of days of salary.

The county has lingering pains from the 1994 debacle. It was forced to declare bankruptcy when the risky borrow-and-invest strategies of then-Treasurer Robert L. Citron backfired, creating more than $1.6 billion in losses. The county borrowed nearly $1 billion to cover the losses and must pay $91 million annually on its debt, which, at $873 million, won’t be paid off until 2026.

In one of the most egregious cases of unmonitored spending, the county planning department spent $24.5 million from reserves and an emergency loan before balancing income and outflow.

Orange County Treasurer-Tax Collector John M.W. Moorlach said he looks at Orange County’s spending increases today with memories of the bankruptcy fresh in his mind. In 1994, before the crisis became apparent to all, Moorlach, a private accountant, ran for election to unseat Citron, warning that the county’s investment strategies could collapse. He lost, but after the county declared bankruptcy, he was appointed to the seat.

Moorlach said he is particularly concerned about the board’s 2002 decision to award sheriff’s deputies a 50% increase in pension benefits, which allows many deputies to retire at age 50 with 90% of their final salaries for life. That increase, and stock market losses, have created a deficit in the county pension fund, forcing officials to consider borrowing millions.

Moorlach faulted county officials not just for the 2% bonuses, but also for agreeing to combine sick leave and vacation time into one benefit, with cash value upon retirement if unused. One study put the cost to the county of combining sick and vacation time at about $30 million.

"You can see the termites coming into the building," Moorlach said. "We’re not going to have a major collapse like we did with Citron. We’re just going to have the whole infrastructure collapse because no one is spraying the termites."

Norby, who was not on the board when those benefit increases were approved, said he believes county officials were not forthcoming about the costs.

"We have to understand the effects of everything we do. It appears a number of things were approved without a full understanding of what the cost was," Norby said. "Some of these were proposed to the board by staff without giving a full explanation of what they meant."

State Is the Wild Card

Budget manager Steve Dunivent said he is confident in the county’s fiscal discipline but remains concerned about the impact the state budget crisis will have on Orange County. In June, supervisors approved a $4.78-billion budget that assumes a certain level of funding from the state, which may or may not be approved by state lawmakers.

"I don’t know of any organization that can say they’re 100% efficient and totally lean," Dunivent said. "But I think, generally, the departments are doing their very best in order to control costs and maintain services to the county."

Robert MacLeod, general manager of the Assn. of Orange County Deputy Sheriffs, said there are areas other than employee compensation where the county should scale back.

"Where the county should look to save money is the ratio of managers to line employees in Orange County compared to similar jurisdictions," MacLeod said.

Supervisors Campbell and Norby said the state’s fiscal crisis heightens the importance of their scrutiny on the county budget.

"Our job is to supervise, not just to be a public relations machine to make the organization look good," Norby said. "If we make mistakes, I want to learn from these mistakes.

July 22


Jean O. Pasco and Lorenza Munoz provided a transition hiccup with “Rackauckas Seeks Halt to Capizzi Hiring and Promoting – GOVERNMENT: After a meeting between the two proved fruitless, incoming D.A. asks supervisors to block any personnel changes until office changes hands in January.” Here are selected paragraphs. I was tossed into the mix because the Board of Supervisors addressed their frustration with Assessor Jacobs by reducing his salary mid-term. I spoke publicly to ask the Board to calm down on their frustrations as it was over an interpretation and that you could not change the compensation mid-term. My concern was an accurate one and the Assessor’s old salary was reinstated not too much later by a court order.

Incoming Dist. Atty. Anthony Rackauckas wants county supervisors to stop outgoing Dist. Atty. Mike Capizzi from hiring more than a dozen new employees and promoting several others before Rackauckas is sworn in on Jan. 4.

Supervisor Todd Spitzer, a former deputy prosecutor frequently at odds with Capizzi, supported freezing personnel activity within the district attorney’s office and Sheriff’s Department for the next five months.

But he said there probably is little the board can do because the positions already were authorized as part of previous budgets.

"The animosity between the incumbents and the newly elected [officeholders] is quite hostile and it’s going to be a very difficult transition," Spitzer said, referring to the fact that both Rackauckas and Carona beat management-backed candidates.

"As a board, we need to do what we can to protect the health and welfare of both of these departments," Spitzer said.

Assistant Sheriff Doug Storm said the Sheriff’s Department’s current hiring is concentrated on new deputies to staff the expanded Theo Lacy Branch Jail in Orange. He said one or two positions are up for promotions but no decisions have been made.

Rackauckas’ appearance Tuesday during the board’s public comments section surprised supervisors. Even Spitzer, who said he was aware of Rackauckas’ concerns, didn’t know that Rackauckas, currently a Superior Court judge, would make his plea publicly.

At least two other elected officials have used the public comments portion of the weekly board meetings in recent months to raise issues with all five supervisors. Treasurer-Tax Collector John M.W. Moorlach protested the board’s decision to reprimand Assessor Bradley Jacobs; Clerk-Recorder Gary L. Granville brought a budget proposal to the board after he felt it wasn’t being adequately advanced by Chief Executive Officer Jan Mittermeier.

Rackauckas said he chose to bring his concerns to the supervisors because he hasn’t been sworn in and found it the most efficient way of communicating with the board.

"I couldn’t get any cooperation with Mike on this and I owe it to these people to do something," Rackauckas said. "So I asked the board for help."

But Rackauckas will have discretion over the new hires, even if every position is filled in the next five months. That’s because all new attorneys are on a one-year probation, meaning they can be terminated at the department’s discretion, [assistant county executive officer for human relations, Jan] Walden said. New promotions are probationary for six months.


Stuart Pfeifer and David Haldane of the LA Times revealed a confidential move that I was invited to make in “Moorlach Seeking County’s Top Job – Treasurer says Supervisor Chris Norby urged him to pursue the position. Board will meet today to discuss all the applicants.” After six months, the Board of Supervisors was still looking for a CEO. Consequently, Supervisor Norby appealed to me to throw my hat into the mix. I was very unhappy with the leaking of this information and did my best, as Board Chair last year, to keep the confidentiality of County Executive Officer candidates during our lengthy search process. One of my dear friends and mentors, a founder of Korn/Ferry International, upon reading the article, demanded that I withdraw my offer and provided sage advice about why I should do so. It did give me an opportunity to articulate the concerns I had at that time that needed to be addressed.

Orange County Treasurer-Tax Collector John M.W. Moorlach, the certified public accountant who forecast the county’s 1994 bankruptcy and became a critic of government inefficiency, said Monday he has applied to become the county’s executive officer.

"I’m happy with my current job," he said, "but I can help improve the county with a financial background. I think I have good credibility with the residents."

Moorlach, 47, is one of several candidates the Board of Supervisors will consider to fill the position that became vacant when it voted to fire Michael Schumacher in January.

Schumacher was the third county executive officer to hold the office since the bankruptcy. The tenures of all three were marked by stormy relations with the board.

Supervisors are scheduled to meet in closed session today to discuss the applicants, whose names they have not disclosed.

Moorlach said he added his name to the list at the urging of Supervisor Chris Norby.

Two other supervisors said they welcomed Moorlach as a candidate.

"I think he knows where a lot of bodies are buried in the county, and I’d be happy to hear what his thoughts are," Supervisor Bill Campbell said. "I’m a little surprised to hear it, because I think he’s doing a good job as treasurer. I have a high regard for John."

Board Chairman Tom Wilson agreed that Moorlach is an interesting candidate. "I’m not quite sure what John is putting forth as his qualifications," he said, "but I’d be glad to look at his resume."

Asked what he considers the major issues, Moorlach cited a recent Orange County Grand Jury report criticizing the county for implementing an employee bonus plan worth $15 million a year, allowing sheriff’s deputies to retire at age 50 with 90% of their salaries, and developing a sick leave and vacation policy that could cost the county $30 million.

"We have room for improvement," Moorlach said. "We could take that grand jury report and start from there."

Former county Executive Officer Schumacher was hired in 2000 after board members chafed under the management styles of his predecessors, Jan Mittermeier and William Popejoy.

In voting 3 to 1 on Jan. 22 to fire Schumacher, supervisors complained that he wasn’t aggressive enough.

Dennis Foley of the OC Register also covered the story in “Moorlach puts hat in O.C. CEO ring – The man who sounded the warning on county bankruptcy says Supervisor Norby approached him.” Here are a few selected paragraphs:

Moorlach was dining July 3 at Athena restaurant in the Santa Ana Performing Arts & Events Center downtown when he was approached by Supervisor Chris Norby of Fullerton.

“He asked if I would consider submitting my name,” Moorlach said. “I said I would make a long list of the reasons why I would or would not.”

Norby said he and other supervisors have been tossing names around and have invited many to apply.

“I think we should cast a wide net,” Norby said. “We need someone of stature, someone who really knows Orange County.”

Moorlach said he has been impressed by names he’s heard in discussions of other potential local candidates, but he declined to name them.

“We need someone to rally around. It doesn’t need to be me,” Moorlach said.

July 23


Michael G. Wagner and Davan Maharaj of the LA Times, with assistance from Ray F. Herndon, Shelby Grad, and Jean O. Pasco, provided a history lesson in “Transcripts Show Genesis of Bankruptcy as Early as ’92 – Testimony: O.C. jury heard both Citron and Merrill’s main trader say they lacked expertise. Brokerage ignored own warnings of pool’s collapse.” More than a month later, the following correction would be published by the LA Times: “A July 23 story about Orange County’s civil damage suit against Merrill Lynch & Co. incorrectly characterized salesman Michael Stamenson’s level of expertise in municipal finance. The story also should have said that Stamenson received monthly, not daily, reports from then-County Treasurer Robert L. Citron. And the article should have noted that Merrill executive William S. Broeksmit’s dollar estimates were of the county’s holdings in one particularly risky investment, not of its potential losses. Also, the article and a subsequent editorial should have quoted Stamenson as disputing that he performed a "war dance" after completing a trade. Finally, the headline should have noted that the civil case had been settled before any jury was impaneled.” Here is the piece in full:

The two central figures in the Orange County bankruptcy who saddled the county with billions of dollars in risky securities admitted in lengthy depositions released Wednesday that each knew little about municipal finance.

In fact, Merrill Lynch super-salesman Michael G. Stamenson, who received daily reports of how much cash was available for investment from the county, told attorneys flatly, "I’m not an expert in municipal finance."

And former county Treasurer- Tax Collector Robert L. Citron testified he had begun to suspect his brain had been deteriorating throughout the period Stamenson had sold him billions of dollars in speculative investments, eventually triggering America’s largest municipal bankruptcy.

Citron said he sensed his brain functions had been waning since 1989, five years before the bankruptcy. "My brain is unable to audit all the information necessary to make executive decisions," he testified.

Merrill Lynch officials insisted that Citron was fully aware of what he was doing and purchasing.

"Mr. Citron’s testimony clearly shows that Mike Stamenson was able to explain clearly, accurately every single security that Citron purchased from Merrill Lynch," brokerage spokesman James Wiggins said.

The provocative admissions by Stamenson and Citron are among the highlights of tens of thousands of pages of sworn testimony taken in the county’s recently settled lawsuit against Merrill Lynch & Co. The documents were released late Wednesday at the urging of The Times and other news organizations. The Times was able to review only a small portion of the testimony late Wednesday evening. Large sections of the transcripts were redacted at the request of attorneys for the county and Merrill.

The newly released testimony by some brokerage executives supports the county’s position that Merrill Lynch knew years before the bankruptcy that Citron’s strategy was badly flawed and could trigger massive losses.

In December 1994, after $1.64 billion had been wiped out of the investment fund, the county filed for bankruptcy. In settlements concerning dozens of investments, the county has since recovered about half of its losses. Last week, current county Treasurer-Tax Collector John M.W. Moorlach has said he wants to consider once again hiring Merrill Lynch to help the county invest its idle cash.

But fully two years before the county’s bankruptcy, a debate raged within the Wall Street investment behemoth over the prudence of aiding Citron’s gamble with billions of dollars in public money.

Top executives, including Merrill’s current chief executive, David Komansky, attended a meeting in late 1992 about Citron’s investment scheme and the county’s dangerous exposure.

Among the clearest warnings that a downfall awaited Orange County if the brokerage did nothing to correct it were made by William S. Broeksmit, the man who helped pioneer the exquisitely complex "derivative" securities sold to Citron.

Broeksmit testified that he walked away from a discussion with a colleague about Citron’s strategy knowing that if the interest rates suddenly reversed, there would likely be "a negative outcome" to the county.

How much of one? he was asked.

"Greater than a billion dollars," Broeksmit testified.

Broeksmit took his concerns to his boss, Edson V. Mitchell, then co-director of Merrill’s fixed-income group. He was asked, "Did you believe that people senior to you . . . should be fully informed about the Orange County investment strategy?"

"Yes," Mitchell responded, including Komansky.

Star Salesman Doing a ‘War Dance’

Despite his professed ignorance of municipal finance, Stamenson amassed a personal fortune selling such instruments to Orange County and took relish in every trade.

"Mr. Stamenson, have you ever been known to do a war dance around the trading room when you completed a trade?"

Stamenson responded, "I became very pleased when a trade was executed, yes. I’m probably guilty of that."

Some Merrill executives testified they had no idea what sort of money Citron was investing.

For example, Amery Dunn, a Merrill Lynch trader who worked under Stamenson, said he wasn’t aware that Citron’s pool contained money for school districts.

"Did anyone discuss with you, prior to Feb. 23, 1994, that some of the monies that were involved with Mr. Citron were school funds?"

"Not that I recall," Dunn testified.

Stamenson too said that even if he had thought about money intended for schoolchildren being funneled into exotic securities, it didn’t matter to him.

"First of all, I did not think of the Orange County pool as school money," Stamenson testified. "I thought of it as a pool of money run by Mr. Citron, by the most professional, successful investor that I’ve ever encountered in my professional life.

"So . . . emotional attachment to school money has no weight with me, because I didn’t think of it in that context," Stamenson said.

The testimony was sought by The Times and other news organizations who urged the court to make it public following the $420-million settlement last month of the county’s lawsuit, and a $17-million settlement to a similar one brought by the Irvine Ranch Water District.

It had become clear by 1992 that Citron was assuming a level of risk that would have been extraordinary for a Wall Street insider, let alone a municipal treasurer.

As early as Feb. 6, 1992, a senior Merrill executive told Citron face to face of the brokerage’s profound concern for the one-way strategy he had chosen to pursue–that U.S. interest rates would remain low indefinitely.

In 1994, six unprecedented increases in the interest rate wiped out $1.64 billion from the county’s pool, triggering the bankruptcy.

Too Leveraged by a Factor of 10

The executive who called on Citron in 1992 was Daniel T. Napoli, a senior vice president of Merrill’s 17-member executive committee.

"You have 10 times the amount of leverage in your portfolio that we allow in ours," Napoli warned Citron then.

Gary Rupert, head of Merrill’s "repurchase" desk at the time, had complained in a memo on Feb. 26, 1992, that the brokerage was "pushing the high end of a prudent target range with respect to any client" in selling Citron volatile securities at the same it lent him billions to buy them.

Napoli, who reported directly to then-Merrill Chairman Daniel P. Tully, had his staff analyze Citron’s investments.

By August 1992, Napoli’s staff knew just how supersensitive to interest rates Citron’s pool really was.

The testimony was expected to provide the first detailed portrait of the side of the Orange County bankruptcy story that has never been told–Merrill Lynch’s.

For 43 months, the investment giant has read from a terse, carefully worded script that "it acted properly and professionally" in its dealing with Citron and the county.

Those familiar with the testimony have said for weeks that it contained some surprisingly candid details.

For example, Stamenson was seen on a 1992 training video exhorting colleagues to emulate his "master of the universe" performance in selling securities to Citron.

By then, Orange County was Merrill Lynch’s largest customer, and the account brought Stamenson millions in commissions and accolades from the firm.

Virtually all the top county officials, many of whom have previously testified by the Orange County Grand Jury, were deposed, including Sheriff Brad Gates.

Gates became a pivotal player in the months after the bankruptcy, grabbing power over day-to-day operations as county supervisors ducked a barrage of public criticism for their failure to avert the fund’s collapse. Gates emerged as a key contact for financial lawyers, bankers and consultants attempting to unwind the incredibly complex fiscal mess, and as a crisis cop for managers within a nearly paralyzed government.

‘There Wasn’t Anybody in Charge’

The sheriff testified he was on vacation and didn’t learn of the bankruptcy until after it had occurred. When he returned, he said, "the county was in complete disarray."

"There was a lot of confusion," he continued. "There wasn’t anybody in charge. . . . We were in the middle of a disaster. I didn’t know much about financial issues and disasters of that type, but I do know what disasters are."

In his testimony, Gates acknowledged for the first time that he ordered a shredder after the bankruptcy and participated in the shredding of documents, although he would not describe exactly what was destroyed.

The sheriff testified that he told then-Assistant Sheriff Walt Fath to obtain the shredder that only he and Fath would have access to.

"I was dealing with a lot of documents on sensitive issues in my department and I wanted to be able to shred those documents and not leave them laying around and also was involved in negotiations on various items for the county with a lot of people," Gates explained.

He said he didn’t keep a log of what was destroyed and didn’t know if Fath did.

Asked specifically if any files relating to the county’s investment pool had been shredded, Gates said, "I have no way of knowing."

The testimony also highlights divisions within Merrill Lynch in the months before the bankruptcy as the problems with the pool were becoming clearer.

Samuel Corliss Jr., a Merrill Lynch broker, testified that Stamenson was unhappy after a April 1994 meeting with the Irvine Ranch Water District–one of the largest investors in the county pool–at which he discussed how harmful higher interest rates would be to the county’s investors.

Corliss said he didn’t actually recommend that the water district pull its money out of the county pool, although the IRWD had chosen to do just that.

Following the meeting, Merrill Lynch officials told Corliss that Stamenson was very unhappy, and that such actions went against the needed "teamwork" to keep the pool intact–eight months before the bankruptcy.

The depositions shed light on questions that have dogged Merrill since the December 1994 bankruptcy filing.

Never completely revealed to Citron, nor to those who invested in the county’s debt issues, was Broeksmit’s warning that "hot money" would desert the county’s pool and hasten its collapse if interest rates suddenly spiked up.

Broeksmit, who left Merrill and now works for Deutschebank in London, at one point urged the firm to sell the entire $2.8-billion Orange County portfolio.

Broeksmit’s fateful warning was contained in a three-page memo to Mitchell, who shared the concern throughout the firm.

Between 1990 and February 1993, the amount of money in the county’s investment pool shot up dramatically, from $2.5 billion to $5.5 billion, as word of Citron’s apparent investment acumen spread.

Even though depositors were required to give the county a 30-day notice before pulling their funds out, Merrill executives correctly foresaw the calamity awaiting Citron should he hit a bad patch and be unable to sustain his high yields.

That many among the 200 schools, agencies and municipalities investing with Citron were doing so solely to take advantage of those yields was not lost on Broeksmit.

"While I’m not an expert in municipal finance, it would seem to me that dramatic growth . . . has been driven by the extraordinary yields being offered," his warning read.

For the past year, The Times and other news organizations have also sought the release of the 9,500 pages of testimony by Merrill executives before the Orange County Grand Jury.

An appellate court ruled earlier this year that the transcripts should be released. Merrill has said it will appeal the ruling to the state Supreme Court.

The release of the civil lawsuit testimony resulted when a coalition of media organizations said it would go to federal court to get access to virtually all of the documents surrendered and depositions taken in preparation for a jury trial that never took place.

Ron Campbell of the OC Register also did a major piece on the topic in “Merrill knew of investment risk – BANKRUPTCY: The brokerage, later sued by the county, sent several warnings, court records show.” This piece included two side articles, one a time line (mentioning the analysis I had done, which detailed the concerns paralleled by key Merrill Lynch executives above) and the other was a list of players.

May 31, 1994: John Moorlach sends his prophetic letter to Supervisor Tom Riley. He warns the pool could implode and says it already has lost $1.2 billion.

JOHN MOORLACH: The certified public accountant who warned of the risks of Citron’s investments is now Orange County’s treasurer-tax collector.


Paul Clinton of the Daily Pilot provided his perspective on “O.C. CEO candidate takes page from Roeder – John Moorlach of Mesa Verde says city manager works well with elected officials.” Here’s a sampling:

If named to the post, he’ll partly model his management style after Costa Mesa City Manager Allan Roeder’s.

“You’ve got a model here in our own city,” Moorlach said Tuesday. “You can have someone who works with five [elected officials], and it can be a long-term relationship.”

The OC Register had an editorial, “Runaway train,” on the Orange County Transportation Authority’s CenterLine project. Here it is in full:

Most anyone who has paid attention to the Orange County Transportation Authority and its board could guess how the vote would go Monday regarding whether to move forward with a CenterLine light-rail system that will move a handful of people at an eventual cost of billions of taxpayers’ dollars. By a 9-2 vote the board gave the project the go-ahead.

OCTA is dominated by mass-transit officials who are completely committed to light rail despite the facts. “It’s the most frustrating thing I’ve ever seen in government,” said Anaheim Councilman Tom Tait. “The facts mean nothing . . . The argument [for CenterLine] is just an emotional one. That’s why when you talk facts, it doesn’t resonate.” He chalks the project up to bureaucratic momentum and groupthink.

But it is bizarre that OCTA believes the future of the county’s transportation system will be built around an 8-mile rail line that goes from nowhere to nowhere.

“There’s a disconnect between the voters and the elected,” is how Treasurer John Moorlach puts it. “We’re all facing financial constraints, tight budgets, talk of increasing taxes, yet we can spend billions of dollars on a boondoggle . . . It’s too bad because we’re talking about such big numbers and disrupting so many drivers to build something that won’t pencil out. It’s just not good economics.”

Mr. Moorlach suggests placing a measure on the ballot that would allow Orange County voters to vote directly for OCTA board members, so at least there is some accountability on such votes.

Mr. Tait argues that the board should set some strict criteria now for evaluating CenterLine. If ridership numbers and cost projections aren’t met – and virtually every light-rail line in the country has less ridership and higher costs than projected – then the line should not be expanded.

Those are reasonable ideas, but they won’t happen. As long as OCTA is run by pro-rail, anti-car ideologues, then a pointless rail boondoggle will remain its prime focus.

July 24


Michael G. Wagner, E. Scott Reckard, and Shelby Grad of the LA Times, along with Davan Maharaj, Ray F. Herndon, Lorenza Munoz and Jean O. Pasco, were back with more in “After Merrill Debate, Profit Beat Prudence – Testimony: Sales staff prevailed over risk analysts warning against O.C. bonds that backfired. Citron’s broker said pool’s safety wasn’t his responsibility.”

For two years before Orange County went bankrupt, Merrill Lynch & Co. officials sharply disagreed among themselves whether to let then-Treasurer Robert L. Citron continue an all-or-nothing strategy of betting on the movement of U.S. interest rates, according to thousands of pages of sworn testimony released this week.

But despite the internal debate that raged within Merrill Lynch & Co. about whether the strategy could prove disastrous, the firm’s profit-oriented sales staff, in the end, prevailed over the firm’s risk analysts who were responsible for safeguarding the company’s investments.

Even Merrill’s top salesman, Michael G. Stamenson, believed it was not the firm’s responsibility to police the county’s portfolio–as this exchange between Stamenson and Orange County attorney James W. Mercer Jr. illustrated:

Mercer: What was your understanding of any responsibility you had to determine whether or not [a purchase] was in accordance with the government code?

Stamenson: As long as Mr. Citron was comfortable with it . . . and I saw no glaring disregard for the government code . . . I saw no problem with it.

Mercer: Is it fair to say you didn’t perceive your responsibility to be that of a policeman?

Stamenson: I carry no badge, sir.

The testimony, taken in a deposition for the county’s recently settled lawsuit against Merrill, also shows the brokerage considered a variety of options that might have averted the bankruptcy but none were pursued.

At one point, some Merrill officials questioned the wisdom of granting Citron credit, but then actually extended his credit line $900 million more than the limit it had imposed.

Orange County settled its civil fraud lawsuit against Merrill last month for $420 million. After that announcement, The Times and other news organizations sought the release of depositions and exhibits compiled in the massive lawsuit.

The testimony shows for the first time how Merrill executives actually viewed Citron’s $21-billion investment pool, whose value plummeted in the fall of 1994 as interest rates continued to spiral upward.

Eighteen months before the collapse in December 1994, Merrill Lynch executives looking to minimize the firm’s financial and legal risks wanted Citron to go public about his unorthodox investment strategy to county supervisors and all 200 cities, schools and special districts in the investment pool Citron managed.

But no such warnings were ever issued.

Instead, Merrill Lynch sales staff and other officials quietly helped the treasurer rewrite his annual report to supervisors issued at the end of 1993, which contained more subtle warnings.

In his deposition, Thomas Akin, former managing director of Merrill’s San Francisco office, was asked whether the warning was issued.

"I don’t believe so, no," he said, adding, "things just moved slower than you’d like them to from all regards."

Citron, too, recalled that Merrill risk managers wanted him to make a special midyear presentation because they were concerned "that they may have a liability . . . if the type of securities they were selling to Orange County failed," he testified.

Broker Torn Between Big Sales and Big Risks

Merrill Lynch recognized the importance of keeping a watchful eye on investments by having Daniel T. Napoli, global risk manager for the firm, report to the firm’s chief executive officer. But there was a natural tension between sales professionals seeking lucrative commissions and fees and those cautioning prudence.

In November 1992, top Merrill officials discussed what the firm should do about Citron, whose pool faced the danger of a run on the bank by investors should interest rates suddenly rise.

Merrill decided to require that all dangerously volatile securities be reviewed by risk managers before sales became final.

It is not clear why, but in Orange County’s case, that task was transferred a year later to sales staff in Chicago.

John Breit, the risk manager who held the job of reviewing the sales, testified he had trouble getting answers about the pool from Stamenson.

"My best recollection is that Mike was reluctant to bother Citron with too many requests and that there were just difficulties in finding everything I wanted to know," Breit said.

But Breit wasn’t too concerned. "Sales has more dealings with clients than I have," he testified.

Merrill spokesman Bill Halldin acknowledged Thursday that company executives did debate what to do about Orange County’s investment pool.

But he said the firm paid close attention to the warnings from its risk managers and twice tried to buy back the entire portfolio of so-called derivative securities from Citron "at a profit to the county."

"There were disagreements, but after meetings a consensus was reached and Merrill Lynch management aggressively moved to implement recommendations," Halldin said.

To those who followed the county’s dealings with Merrill, the relationship had few checks and balances.

"This just shows that money talks," said Fred Smoller, an associate professor of political science at Chapman University who tracks county government. "It’s pretty clear that the incentive system [at Merrill
Lynch] was to reward bringing in business, not necessarily doing the right thing."

Current Treasurer-Tax Collector John M.W. Moorlach, who while running against Citron earlier in 1994 expressed concern about the investment pool, on Thursday expressed a similar view, calling Merrill’s reluctance to more forcefully express its concerns to other county officials a failure.

"It gets back to greed. Greed overrode good internal oversight," said Moorlach, who recently suggested that the county consider rehiring Merrill for investment advice but wants the company to rebuild its credibility with the county first.

Until the bankruptcy, Citron was such a big revenue producer for Merrill that officials were acutely sensitive about what they could even discuss with him, lest they make him unhappy and risk losing Orange County’s business.

"The big discussion around the office was how much can we tell Mr. Citron what to do," according to Akin, Stamenson’s boss.

Even though executives met several times to discuss what they considered Citron’s foolhardy strategy, Akin said he was never instructed to tell Stamenson to chart a less-risky path for the treasurer.

"The best of my recollection was that we did make an effort to sell securities to Orange County that would reduce leverage in the portfolio," Akin said, adding, "I believe that point had been discussed quite extensively."

But at the time of the pool’s collapse, Citron had leveraged with Merrill’s help the pool’s $7.5 billion in assets, borrowing and investing another $14 billion.

And the testimony indicates that when Citron wanted credit to make more investments, he got it.

Gary Rupert, who headed Merrill’s repurchase desk, said he helped set credit limits for clients such as Orange County.

Rupert testified he wasn’t aware Orange County had exceeded its credit limit at one point by $900 million. He said he later told Napoli but he couldn’t remember how the risk manager responded to the news.

"I gave him the data and asked him if he had any questions," Rupert testified. "He said no and then basically left."

No One Wanted O.C. Supervisors to Know

Had Merrill’s risk managers insisted Citron disclose his risky strategy in mid-1993, county supervisors might have been compelled to take action to prevent a collapse.

Asked why the firm didn’t just tell the board itself, Richard M. Fuscone, managing director of Merrill’s fixed income securities group, testified that would have been "an extraordinary event" that would unnecessarily alarm the Board of Supervisors.

For his part, Citron testified that he adamantly opposed the idea of Merrill Lynch officials talking directly to the Board of Supervisors about the risks he was running.

Citing a previously disclosed tape-recorded conversation with Stamenson, Citron recalled he told the Merrill salesman that he wouldn’t permit such a direct meeting because "when Merrill Lynch sold me these securities, they . . . said they were suitable for my portfolio and that they were an excellent investment . . . they made very high returns."

Citron continued, "And Mr. Stamenson’s reply to that statement . . . was, ‘Bob, I knew you would say that, and I agree with you completely.’ "

When questioned by county lawyers about what was suitable and legal for Merrill to have sold Citron, Stamenson said it wasn’t his responsibility to know.

"As long as Mr. Citron was comfortable with it . . . and I saw no glaring disregard for the government code . . . I saw no problem with it," Stamenson said.

Tom Cahill of Bloomberg News provided a different perspective of the transcripts with “Orange County’s Citron Used Star Chart for Investment Strategy.”

Former Orange County, California, Treasurer Robert Citron’s performance as manager of the county’s investment pool may have been truly stellar, recently released court documents show.

Citron consulted a $4.50 star chart prepared by an Indianapolis astrologer to help guide his strategy for the county’s $20 billion investment portfolio, according to depositions from a lawsuit the county filed against Merrill Lynch & Co. His wrong-way bets on the direction of interest rates in 1994 helped lead to $1.6 billion in losses and the nation’s largest municipal bankruptcy.

Before his bets turned against him, Citron’s financial prowess and penchant for turquoise jewelry earned him the moniker “Sun God,” according to John Moorlach, who replaced Citron as the county’s treasurer. Citron’s 21-year tenure was known for above-market returns of about 10 percent annually, including a 17
percent return in 1982.

“If you want to be the Sun God you better look at the stars,” joked Moorlach.

Citron pleaded guilty to lying about conditions that led to losses in the county’s investment pool and completed his work-release sentence last October. The county emerged from 18 months of bankruptcy in June 1996.

In Right House?

Citron’s use of star charts was known by employees at Merrill Lynch, in particular Michael Stamenson, the salesman who sold Citron many of the securities used in his investments.

“He never told me that he was going to put off doing anything until the stars were in the right house or — however they measure those things,” Stamenson said in his court deposition available on the Orange County Register’s Web site. “But he did make reference to it once.”

Merrill, the nation’s largest retail brokerage, agreed to pay $400 million last month to settle the suit over its role in the county’s bankruptcy.

Earlier this week, Morgan Stanley Dean Witter & Co., the No. 1 U.S. securities firm by equity capital, agreed to pay $69.6 million and Nomura Securities International Inc., Japan’s biggest broker, to pay $47.9 million, bringing the total recovered by the county to $739 million.

Moorlach said there may be a time when the county will do business with Merrill and Morgan Stanley again.

“Merrill has learned that they may have to do some fence-mending to restore themselves in Orange County,” Moorlach said. “There are still some bitter feelings, but I see somewhere in the distance we will be working with them.”

Citron’s strategy of borrowing money short-term to buy longer-maturity derivative securities was successful in 1992 and 1993 as interest rates dropped. It collapsed in 1994 when rates surged. By the time of the bankruptcy, the county had borrowed more than $13 billion.

Orange County contends that repurchase agreements, or repos, provided by Merrill, Nomura and other firms put the county in violation of debt limits imposed by California law.

Citron said in court documents that he used the star chart for clues to upcoming market events. He used star charts drawn up by Indianapolis astrologer Marguerite Carter from the 1980s to 1993, according to the Orange County Register, which first reported the story. Shortly after he ceased using the charts, his strategy collapsed.

`Harmonic Convergence’

Astrological forecasters say that they often look for unusual celestial events for hints of coming volatility.

“You have to have a major harmonic configuration of planets,” said Arch Crawford, who has run a financial astrology newsletter. “I called the crash of 1987 perfectly.”

Crawford gives predictions on the bond, gold and stock markets over a 900 phone number. He said he called the top of the current bull market in stocks as “the day before yesterday.”

“Some people think they have the magic bullet, but there is no such thing,” said Victoria Martin, an astrologer who makes a daily forecast available over Bloomberg LP terminals.

Martin reports on lunar cycles, solar flares and other astrological happenings with a possible impact on people and, by extension, financial markets. Still, she doesn’t expect anyone to buy or sell based on her advice.

“It’s for entertainment purposes only,” said Martin.


The OC Register had a kind and realistic editorial, “CEO Moorlach?,” that weighed in on the leaked news of the tossing of my hat.

In an unusual turn of events, Orange County Treasurer John Moorlach has indicated his interest in becoming the next county executive officer. He was approached by county Supervisor Chris Norby, who is looking to generate as many good candidates for the job as possible. In management seminars, this probably is called thinking out of the box.

We like the idea.

Mr. Moorlach is well-known for having predicted in 1994 that investments by then-Treasurer Robert Citron were headed for trouble. His warnings weren’t headed, the county experienced a bankruptcy when Mr. Moorlach’s predictions came true, and Mr. Moorlach was appointed, then elected and re-elected Treasurer.

He retains his reputation as a white knight, someone known for his sound judgment and integrity. But Mr. Moorlach also is known for his wry wit, strong opinions and willingness to speak out about important matters, regardless of the political consequences. Being an elected official means that he is accountable to voters, not the board. As a result, he has the perfect platform to speak freely. That would change if he became CEO.

There could be some interesting clashes with the board. But Mr. Moorlach might strike the right balance the county has been missing. The last permanent CEO, Michael Schumacher, let Rome crumble around him, whereas his predecessor, Jan Mittermeier, was a notorious micromanager.

It would be nice to have a pro in charge of a county that currently is reeling under the weight of overspending. But are the supervisors willing to hire someone who would approach them on an equal footing? It will be interesting to see the answer.


OC Register columnist Frank Mickadeit provided his “Mickipedia.” I sent him an e-mail clarifying that the date was December 6, 1994, and that I usually take landmark photos with my kids in them.

Moorlach, John – Former O.C. treasurer and now a county supervisor. An accountant by trade, he is best known for warning everybody about the county’s impending financial meltdown in early 1994, only to have everybody write him off as a nut job. Celebrates the anniversary of the county’s Dec. 4, 1994, bankruptcy by having a tuna melt, extra cheddar, at the Norm’s at Main and 17th. Goes around the state getting his picture taken at every one of the official state historic markers that you run into every now and then. (Only one of the preceding sentences is false.) Butt ugly.

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