Cash crunch abating for Charles coffers

August 17, 1994|By Joel Obermayer | Joel Obermayer,Sun Staff Writer

The cash crisis that left Charles County's government without money to pay some of its bills is coming to an end, county officials said yesterday.

The crisis was triggered after county commissioners discovered in July that deputy treasurer Stephen R. Johnson had invested about $30 million of operating funds in highly speculative securities. County officials sued nine brokerage firms to void those investments -- a move that tied up virtually all of the county's cash.

Yesterday, county officials announced an agreement with California-based Liberty Capital Markets Inc., allowing the county to sell about $16.6 million of the securities.

The county also has reached an agreement to return a smaller number of investments to another firm for their purchase price, said Howard G. Goldberg, a Baltimore lawyer who represents the county commissioners.

He predicted that there would be agreements with two more firms by the end of the week.

"The cash crunch will be averted," said Mr. Goldberg, managing partner of Smith Somerville & Case.

County officials clearly were relieved by the developments.

"The nightmare scenario is gone," said County Commissioner Murray Levy. "I feel better, but I still do not feel good. There are still losses involved; we have a lot more to do to recover all the funds."

By county law, the treasurer's office is supposed to put operating funds -- money used for expenses later in the year -- into conservative, short-term U.S. government securities.

But county officials say that Mr. Johnson used the money to buy medium- and long-term securities that were highly vulnerable to interest rate swings.

The huge and frequent bets on the direction of interest rates soured when interest rates rose earlier this year, according to Samuel Ketterman, the county's financial adviser. The county has estimated that the investments had lost $2.8 million before the county found out what was going on.

Mr. Johnson was fired soon after the losses were discovered. He has not commented on the dispute.

On Aug. 5, the commissioners filed suit in U.S. District Court in Baltimore against the brokerage firms that had sold most of the investments to the county. The commissioners argued that because the investments violated county law, legally they never occurred. For that reason, the county also maintained that it did not have the authority to sell the investments.

The agreement announced yesterday -- which has been approved by a federal magistrate -- will allow the county to sell some of those securities, county officials said. But because many of the investments lost money, the court case will continue, to decide whether the brokerage firms must compensate the county for its losses.

County officials said their investigation into the securities trades was not yet complete; a criminal investigation by the Charles County state's attorney is under way.

Mr. Ketterman said sales of the investments would begin today and would likely continue for several weeks.

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