Orange County DA is latest agency to join probe effort into fund debacle.

LOS ANGELES -- Signaling the launch of criminal probes into the Orange County, Calif., financial crisis, county district attorney Michael R. Capizzi served search warrants Monday on the offices of the county treasurer and the county auditor-controller.

A team of 30 investigators worked into the evening, loading two vans full of documents and computers seized from the offices -- some of which were sealed off with yellow crimescene tape.

Capizzi said in a prepared statement that the warrants were served Monday morning as part of his investigation into the events surrounding Orange County's filing for Chapter 9 municipal bankruptcy.

"This action is not intended to disrupt or hamper the county's efforts to untangle the financial situation, and cooperation will be extended to those departments and agencies requiring access to the records," Capizzi said. "No further announcements concerning the investigation will be made at this time."

The district attorney's office is just the latest in a slew of agencies looking into the Orange County investment debacle, including the U.S. attorney's office, the Securities and Exchange Commission, the state auditor-controller and the state Department of Corporations.

Investigators are believed to be focusing on whether the county treasurer's office misled the other pool fund participants about the status of their investments, and whether brokers such as Merrill Lynch & Co. gained undue influence through political campaign contributions to former county treasurer-tax collector Robert L. Citron, who resigned on Dec. 4.

Citron lost more than $2 billion this year on the county's $7.8 billion investment fund, which included billions of dollars in deposits from 187 local governments. Many of those governments also are now facing financial ruin.

Although investigators were answering no questions yesterday, the possibility of criminal prosecutions and jail sentences have not been ruled out.

"They've certainly been playing a major obfuscation game here by not revealing the true facts of the portfolio," said John Moorlach, an accountant who warned of the fund's risky investments while running against Citron for the treasurer's post earlier this year.

"We've had Bob Citron and [assistant treasurer] Matt Raabe reassuring everyone to the bitter end," Moorlach said. "They were certainly going through a major case of denial, but I don't know if that's criminal or not."

Both Citron and Raabe retained private attorneys and stopped answering questions shortly after the bankruptcy filing. Their lawyers, Terry W. Bird and David Wiechert, could not be reached for comment yesterday.

The county transportation agency and the county sewer agency have both said that Citron promised to put a portion of their money into a separate, protected account. It is still unclear whether those accounts exist or whether Citron commingled them with the county's doomed investment fund.

In other developments:

* Standard & Poor's Corp. announced late Tuesday that county officials told the credit agency they intend to disburse most taxes and other revenues collected after the Dec. 6 bankruptcy filing.

The county, however, probably will not release taxes collected between Nov. 30 and Dec. 6, Standard & Poor's said.

The county's plan should allow tax apportionments to be made on schedule Friday, Dec. 23, with local governments having immediate access to the funds.

* Duff & Phelps Credit Rating Co. announced yesterday that it has placed three Anaheim, Calif. bond issues on "Rating Watch-Down."

The action affects $202 million of electric revenue bonds, $27 million of water revenue bonds, and $13 million of public finance authority water revenue bonds -- all currently rated AA.

The Chicago-based rating agency said the city's investment of 20% of its portfolio in the Orange County fund is viewed as "deleterious but not traumatic" to the credit quality of the debt obligations.

* Two private holders of Orange County bonds have filed a class action lawsuit against Citron and Merrill Lynch broker Michael Stamenson charging that they steered the county fund into a series of reckless investments.

The suit was filed in federal court Friday by attorneys working for Floyd Demanes and Charles Schonfeld, on behalf of themselves and other buyers of county-issued debt.

* Attorneys for two young girls filed a civil damage claim in federal court Monday accusing Citron and Merrill Lynch of squandering settlement money from accidents in which the girls were badly injured.

Settlement awards of $260,000 and $96,000 were put into the county fund at the urging of judges who believed the girls would earn higher interest rates there.

Both may be forced to share in the investment fund's 27% loss.

* A U.S. bankruptcy judge ruled Monday afternoon that the county will be allowed to release emergency funds to other public agencies, including $115 million to the county Department of Education, $4.6 million to the Orange County Water District, and $3 million to the Orange County Transportation Authority.

* A county investment adviser said Monday that a major portion of the proceeds received to date from the sale of Orange County bonds are going to pay off the numerous loans that got the county into trouble in the first place.

About $800 million of the $1.39 billion raised so far has gone to satisfy collateral calls from the county's lenders, said Christopher Varelas, an executive with Salomon Brothers Inc., hired by the county last week to help manage the fund.

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