For a month now, the financial press has been warning of an imminent blowout; Federal Reserve Chairman Alan Greenspan admitted on June 6 that “the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy”; and a battle royal has broken out at the U.S. Securities and Exchange Commission.

But Cox has also made a name for himself as a defender of speculators. As a lawyer in California in the 1980s, specializing in venture capital, Cox was named in a lawsuit brought by investors for fraud. The plaintiffs accused Cox of misleading regulators and investors about the conditions of a real estate investment. Although he was ultimately dropped from that suit before his firm settled out of court, he admits that he learned from that experience to “sympathize with people who are victimized in these lawsuits.”

This sympathy for speculators led Cox in 1995—by then a Congressman—to write the “Private Securities Litigation Reform Act,” which restricted the ability of clients to sue their brokers for securities fraud. As part of the “Gingrich Revolution” after the 1994 mid-term election—the “Contract on America”—Cox’s bill became the only legislation to become law over a veto by President Clinton. (Cox’s callous view of investors who get swindled by speculators did not hold him back from demanding a government bailout when his own Orange County, California, went bankrupt as a result of bad derivatives investments!)

Robert Lafee Citron is a Democratic Party politician who was the longtime Treasurer-Tax Collector of Orange County, California when Orange County declared Chapter 9 bankruptcy on December 6, 1994. Citron was the only Democrat to hold office in otherwise Conservative/Republican Orange County at the time. The bankruptcy was brought on by Citron’s investment strategies that left the county with inadequate capital to allow for any raise in interest rates for its trading positions. A cash crunch occurred when interest rates increased and financiers for the county required increased collateral from the county.

Citron controlled several Orange County funds including the General Fund, the Investment Pool, and the treasury Commingled Pool. He sent out the county’s tax bills with rhyming slogans, such as “Taxes paid on time never draw fines.”[1] He won re-election seven times; in his last election victory, his opponent, John Moorlach, charged that his handsome gains were the result of risky betting.[1]

As controller of the various Orange County funds, Citron had taken a highly leveraged position using repurchase agreements (repos) and Floating Rate Notes (FRNs). The loss incurred by the usage of these financial instruments reached the amount of $2 billion and was caused by being too highly leveraged for rising federal interest rates.[1] In other words, if federal interest rates had not risen, the massive trading position would have been a substantially profitable position; if interest rates did rise, the trading position would result in substantial losses. In fact, rates rose.

The Orange County funds, managed by Citron, were worth $20 billion.[1] However, Citron went out to the repo market and leveraged the County Pools to amounts ranging from 158% to over 292%. To obtain this degree of leverage he used Treasury bonds as collateral. Profits of the fund were excessive for a period of time and Citron resorted to concealing the excess earnings. He pleaded guilty to improperly transferring securities from the Orange County General Fund to the Orange County treasury Commingled Pool.

The county’s finances were not suspect until February 1994. The Federal Reserve Bank began to raise US interest rates, causing many securities in Orange County’s investment pools to fall in value. As a result, dealers were requesting extra margin payments from Orange County. These extra margin payments were funded in part by another bond issue made by Orange County; the size of that bond issue was $600 million. However, this fix proved to be only temporary. In December 1994, Credit Suisse First Boston (CSFB) realized what was going on and blocked the “rolling over” of $1.25 billion in repos (”rollover” essentially means issuing of another repo when the previous one ends, but, at the new prevailing interest rate). At that point Orange County was left with no recourse other than to file for bankruptcy.

Citron pled guilty to six felony counts and three special enhancements. Charges also included filing a false and misleading financial summary to participants purchasing securities in the Orange County Treasury Investment Pool.

While in bankruptcy, every county program budget was cut, about 3,000 public employees were discharged and all services were reduced. Citron was ordered to serve five years of supervised probation, and to perform 1000 hours of community service. Citron did not serve any time in prison.

And so the fraud continued for more than a decade. It later turned out that the assets sold to investors were largely fictitious, and that the supposed auditor, who presented credentials showing she worked for the California Department of Corporations, was in reality an actress hired by the man running the fraud.