Speculation squeezes Charles Co. treasury

August 09, 1994|By Joel Obermayer | Joel Obermayer,Sun Staff Writer

The Charles County government disclosed yesterday that investments in highly speculative securities by a now-fired official and the entanglements of a subsequent lawsuit have left it strapped for cash and possibly unable to pay short-term bills.

"Virtually no county funds are available to meet the county's short-term cash requirements" over the next 45 days, the county's chief financial officer, Richard Winkler, said in a court document filed Friday in a lawsuit against nine brokerage firms that seeks to reverse the trades.

The investments resulted in losses to the county of some $2.8 million, according to preliminary estimates, officials said.

The largely rural Southern Maryland county plans to meet its financial obligations by delaying payments to local agencies such as the county board of education, Charles County Community College and the sheriff's office, said Howard G. Goldberg, a Baltimore attorney representing the commissioners.

County commissioners learned of the trades when an accountant attached to the commissioners' office noticed a large loss in the funds. The trades were made by Deputy Treasurer Stephen R. Johnson, but they all required approval from elected County Treasurer Thelma Bowie, Mr. Goldberg said.

Mr. Winkler, the county financial officer, said $27 million intended to be used for bills this year and to be invested, meanwhile, in short-term government bonds was placed, instead, in riskier securities, about one-third of it in "derivatives" -- highly speculative investments whose value can fluctuate wildly depending on such factors as changes in interest rates.

"These investments were totally inappropriate. They should never have happened," Mr. Goldberg said yesterday.

Since the trades were discovered in early July, Mr. Johnson has been fired and Ms. Bowie has turned over control of the funds to the county commissioners' office.

Neither Mr. Johnson nor Ms. Bowie could be reached for comment.

County officials said the loss estimates were preliminary, and the final tally would not be known for some time.

In the lawsuit, the county seeks to reverse the trades and get back the money paid for the derivatives.

In recent months, some mutual funds have come under fire for investing in these securities without disclosing it to investors. In addition, several companies, including consumer products manufacturer Procter & Gamble Corp., have admitted to losing millions of dollars through trades with derivatives.

But so far relatively few municipalities or public agencies have lost money.

If the judge does not reverse the trades quickly, the county will not be able to make all its payments, Mr. Winkler said in his affidavit.

Mr. Goldberg said that the millions of dollars kept on hand for short-term operating expenses are, by law, supposed to be invested in short-term U.S. government securities -- the most conservative of investments. But, starting 18 months ago, the county treasurer's office started investing that money in various long-term securities, including the derivatives.

Derivatives take their value from another security, such as a mortgage, stock or currencies. In the Charles County case, the derivatives involved mortgages.

Last week, the county commissioners filed suit against the nine securities firms -- including Smith Barney Inc., Prudential Securities and Donaldson, Lufkin and Jenrette -- that had sold the securities to the county. Officials of the various companies were not available for comment yesterday.

Mr. Goldberg said that, since the trades were against state law, legally they never happened.

Similar suits have been filed in other recent cases where companies or institutions have suffered heavy losses trading in derivatives.

"We have a hearing scheduled next Wednesday requesting a preliminary injunction to get the trades reversed and the money returned to the treasury," Mr. Goldberg said.

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