$85 Million Was Diverted in O.C. Pool, Audit Finds : Bankruptcy: Interest that should have gone to investors went to two special accounts. Records are turned over to investigators. Assistant treasurer is placed on leave.

In another fiscal jolt, Orange County officials revealed Saturday that the county treasurer’s office had apparently falsified records and diverted about $85 million into two special accounts, shortchanging scores of cities, school boards and special districts of interest payments.

Board of Supervisors Chairman Gaddi H. Vasquez said that it was unknown why the money was diverted and that all records were being turned over to the district attorney and the U.S. Securities and Exchange Commission, both of which are investigating the county’s financial collapse last month.

“We haven’t looked at what laws have been broken, but it appears that government records were falsified,” said Jim Mercer, an attorney working for the county. “All we know is that money that normally would have been allocated to pool participants was instead kept in an account at the treasurer’s office,” Mercer said. “Nobody at this point has told us why that was done.”

The diversion was discovered after an audit by the accounting firm of Arthur Andersen & Co. County officials and their financial advisers said Saturday that they have found no evidence of embezzlement or that the $85 million diverted from investors since August, 1993, was intended to help with the county’s worsening cash-flow crisis. Accountants said another $15 million also may have been diverted.

The money is owed to the 187 public agencies that invested in the county pool managed by former county Treasurer Robert L. Citron, who resigned two days before the county filed for bankruptcy Dec. 6.

Assistant county Treasurer Matthew R. Raabe was placed on administrative leave after refusing to answer questions about the special accounts, Vasquez said at a Santa Ana news conference. Other employees inside and outside the treasurer’s office may also face disciplinary action, officials said.

Neither Citron, Raabe nor their attorneys could be reached for comment Saturday.

None of the diverted interest has been spent, officials said, and clear records now exist that will enable the money to be returned to investors. Pool participants will likely be credited with 1% to 2% more interest than they were given for the past 18 months.

“We will be able to correct the records,” said Bruce Bennett, the county’s bankruptcy attorney.

Two county officials who have reviewed the audit said Saturday night that the evidence of impropriety was undisputed. They said the treasurer’s office kept two sets of books, one of which showed the actual amount of interest earned on investing agencies’ money and the other showing the amount credited to the agencies. The difference between those figures was put in the two special accounts.

“The path to this was so clear it was stupid,” one of the officials said.

During the audit, Andersen accountants found that one of the special accounts, the county’s “economic uncertainty” fund, earned a higher rate of return itself than other participants in the now-failed investment pool beginning in summer, 1993. They also found another fund, known as “9JJ,” that was opened in July, and appears to have also earned higher yields than the rest of the pool.

All investors in the county’s commingled pool are supposed to earn the same amount of interest on their money, officials said. But the discovery of two small funds earning higher rates indicated that pool participants were shortchanged some interest, which was funneled into the two county-held funds, officials said.

At the request of County Administrative Officer Ernie Schneider and former budget director Ron Rubino, the Board of Supervisors set up the economic uncertainty fund two years ago when the county’s investments earned more interest through Citron’s pool than had been anticipated in the budget. Money in the fund has recently been used for public libraries, fire services and the county general fund, documents show.

Schneider and Rubino said Saturday that they initiated the fund and administered its proceeds, but did not keep track of how much went into it, or how it got there.

“That was the treasurer’s responsibility. Citron was responsible for keeping the accounts straight,” Schneider said. Regarding Saturday’s announcement about the diverted interest money, he said: “It was news to me. I was as surprised as anyone else.”

Rubino said news of the interest diversion was “a real shocker.”

The second fund--the 9JJ account--is set up in the format of a pool participant’s account, but no pool participant was designated for it, Mercer said. Accountants are trying to determine how the fund was used.

The announcement that funds were diverted from investors to the treasurer’s accounts brought more shock to pool participants who already are battling with the county to get their money back. “It’s sad. If we can’t keep an accounting of where the monies are, that’s a pretty poor reflection,” said Irvine City Manager Paul O. Brady, who represents cities on the county’s bankruptcy pool participants committee.

Gary Streed, director of finance for the Orange County Sanitation District, said he found it “astonishing” that the pool may have earned enough interest that participants could be paid such high yields, with 1% to 2% more apparently funneled into a separate fund.

For county leaders, the news was another shocking reminder that the county has a long way to go before digging out of bankruptcy.

“God forbid that there’s anything else like this in the wind,” said Supervisor Roger R. Stanton.

Times staff writer Rebecca Trounson contributed to this story.