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Citron: Heat From Politicians, Brokers Fueled County’s Bankruptcy

January 17, 1995

SACRAMENTO, Calif. (AP) _ Financial pressure from politicians and Merrill Lynch sales pitches led to Orange County’s disastrous casino-style investments, former Treasurer Robert L. Citron testified Tuesday.

Citron’s assertions at a state Senate committee hearing marked the first public remarks from the man at the center of the bankruptcy of the nation’s fifth-largest county last month.

His history of lucrative investing of public funds had made him a hero to the county and 186 other government entities that pooled their money in the county investment fund.

But Citron’s plunge into heavy borrowing from brokers to purchase risky securities resulted in a $2 billion loss. This led to the biggest municipal bankruptcy in U.S. history and focused national attention on the investment practices of local officials entrusted with public funds.

Citron testified there was virtually no oversight of his activities. He never relayed to county supervisors 1993 warnings about his portfolio from Merrill Lynch & Co., his chief broker, or told them of a 1994 inquiry by federal securities regulators.

``I was so sure of what I was doing based on the many years of success I had,″ he told the Senate Special Committee on Local Government Investments.

``In retrospect, I find that I was not the sophisticated treasurer I said I was,″ he said, adding there should be restrictions on the types of investments he made.

Merrill Lynch, the nation’s largest broker, remained above the financial scandals of the 1980s but has come under scrutiny in the Orange County mess, with particular questions of whether star municipal investment salesman Michael Stamenson improperly pushed risky strategies on Citron.

Even as it warned Citron that rising interest rates could torpedo his fund, it continued to sell him interest rate-sensitive securities and provide him with some forecasts of lower rates by its top analyst, Charles Clough.

Merrill Lynch, which made more than $100 million in the 1993-94 period selling securities and underwriting municipal bonds for the county, has portrayed Citron as a sophisticated investor who would simply give his business to others if Merrill threatened to cut him off.

Paul Critchlow, a Merrill Lynch spokesman, said Citron had helped pass many laws easing treasurers’ investments and shown an understanding of the complexity of arcane derivative securities in official reports and letters.

Critchlow also said Cirtron had described developing software to monitor complex investments, and had criticized San Jose officials in a similar investment loss, blaming them instead of Merrill Lynch.

``He can’t say all those things and then say he was unsophisticated and was led down the garden path by Merrill. It just doesn’t wash,″ Critchlow said.

Citron acknowledged that he had never conducted a study of the combined circumstances that brought down his fund: Sharply rising interest rates, heavy demands by brokers for more collateral, and some investors deciding to redeem their holdings.

``In retrospect, I would presume that a fund such as ours could have a small board of advisers,″ he said.

Citron, appearing under oath but without a promise of immunity against criminal prosecution, testified in generally confident and measured tones. After some pointed questions, he paused at length, then stuttered during his replies. He appeared tired as he was escorted away by his lawyer’s wife.

Financial services mogul Eli Broad, an adviser to the committee, noted that Citron wielded ``absolute power″ with no checks and balances over $20 billion in assets.

He asked whether Citron now would support laws to ban the kind of heavy borrowing and speculative investments in derivatives that finally wrecked his fund. Citron said he would.

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