LOS ANGELES - Securities and Exchange Commission chairman Arthur Levitt, indirectly referring to the Orange County, Calif., fund crisis, said Wednesday that county voters should strike back at their elected leaders in the aftermath of last week's bankruptcy filing.
Even without naming names, Levitt didn't hold back in his remarks at a town hall meeting in downtown Los Angeles.
"If you are the custodian of a state or municipal pension fund, if you are supervisors, if you are a state government, if the code of ethics in your community are so lax that they allow you the unique power without oversight to make that kind of speculation, I think the voters of that community should throw the whole bunch of you out of office," said Levitt, sparking a round of applause from the 200-member audience.
Throughout his speech and during questions afterward, Levitt tried to avoid saying anything that might affect the ongoing bankruptcy crisis unfolding in Orange County.
He refused to comment on the actions of Merrill Lynch & Co., the county's main investment adviser and the target of much criticism these days for allegedly steering county officials into investments that have so far caused a $2 billion loss in the county's investment portfolio.
The chairman also refused to say whether he believes there was any criminal activity involved in the management of the portfolio.
But his remark about throwing elected officials out of office caused a stir after the speech, which was sponsored by the nonprofit organization Town Hall Los Angeles.
"I remember hearing that [remark] and being startled by it," said Matthew Rae, a Los Angeles attorney and past president of Town Hall. "At least locally, we in the audience would interpret that as meaning get rid of the board of supervisors.
"I also wondered, `Is he advocating a recall movement?'" Rae said. "It was somewhat inherent in the statement he made."
However, other members of the organization disagreed.
"No, I didn't get that sense," said Samuel P. Bell, a managing partner of the New York-based accounting firm Emst & Young. "My sense was, there is certainly a responsibility that runs with [public] office ... but I would not want to say that he took it a step further and said that he thinks they should resign."
Levitt cut short the question-and-answer portion of his speech, and he was not available afterward to expand on his statement.
Orange County supervisors could not be reached for comment yesterday, as they spent most of the morning discussing the bankruptcy crisis in closed session.
There have already been many calls for the supervisors to resign, but there is no official recall movement as yet.
County treasurer-tax collector Robert L. Citron submitted his resignation Dec. 4, after 24 years in office. He had won a resounding reelection just six months ago with 60% of the vote.
Levitt, in his speech, made it clear that voters were partially at fault for the investment debacle that - although there were some warnings - only became widespread knowledge on Dec. 1, when Citron announced the county fund had declined in value by $1.5 billion.
"Now, you had an election in Orange County. Certainly that's an oversight responsibility that was abdicated," Levitt said.
Levitt said that increased municipal bond disclosure is needed, such as the disclosure of bond prices and other information that will be made available through ongoing Municipal Securities Rulemaking Board and Public Securities Association initiatives. He cited a laundry list of the kind of disclosure he thinks is necessary, including last sale reporting for frequently traded bonds, newspaper price listings, consumer education programs, and more publicly available information on sales commissions and credit ratings.
Levitt said his office has already brought a great deal more disclosure than had existed previously, but he promised there will be more through the MSRB and PSA initiatives.
"Have we gone far enough? No," he said. "Will we go further? A lot further ... We haven't brought the kind of disclosure that I think is necessary."
Although Levitt's visit was scheduled well before the Orange County crisis erupted, the topic of his speech seemed all too appropriate for the day: "Consumer Protection, Tips From an SEC Insider."
Levitt urged the audience to learn as much as possible about their investment choices before writing a check. All investments come with some risk, he said, no matter how secure they may seem.
Many investors in the Orange County Portfolio assumed their deposits were safe because they were being put into a government fund. But most did not understand the complex and risky nature of Citron's derivative securities and reverse repurchase agreements.
"I don't care if the fund is named the Rock Solid Honestly Safe U.S. Government Guaranty Trust Savings," Levitt said. "In any market investment, you stand a chance of losing your principal."
Despite the risk, he said, "I've known people who s end more time comparison shopping for paper towels than for investments. There's no excuse for that."
