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Bernalillo County was about to run out of cash, and the treasurer’s office wanted a loan.

Patrick Padilla – who was handling county investments at the time – joined a colleague and headed upstairs to see the county manager.

They wanted permission to issue something called a Tax Revenue Anticipation Note, or TRAN, which they would use to secure a short-term loan by pledging future tax revenue.

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They allegedly told then-County Manager Tom Zdunek that there was a shortage of cash to pay the bills required to run New Mexico’s largest county government and that a loan could bridge the gap until more tax revenue rolled in.

Padilla to run again?

Former County Treasurer Patrick Padilla – a key figure in the county’s investment controversy – says he did nothing wrong.

In fact, Padilla said, he may run for the treasurer’s office again to get the county back on track.

“I came up with a lot of innovative ideas,” Padilla, a Democrat, said in an interview. “It looks like I’m going to have to come back and straighten out the county and get the county back to where it should be.”

He maintains that the county didn’t have to sell investments at a $17 million loss, as it did after he left office. If the county had trusted his plan and waited out the market, he said, it could have sold many of the bonds at a profit.

“That one caught us all by surprise,” recalls Zdunek, who described the meeting in a deposition obtained by the Journal .

“They thought they had an extra, I believe, $90 million to invest. That turned out to be incorrect,” and the county tied up too much of its money in long-term bonds, Zdunek said in explaining how he thought the county cash crunch came about.

Zdunek refused to authorize the tax anticipation note, and the county – which typically doesn’t borrow money to make payroll and cover other operating expenses – soon resorted to selling long-term investments to put cash in the bank and pay its bills.

The surprise visit to Zdunek was an early chapter in an investment crisis that would ultimately cost Bernalillo County taxpayers about $17 million.

Padilla, for his part, denies that the meeting described by Zdunek took place. The two did run into each other in a hallway once, Padilla said, but it was Zdunek who was worried about a cash shortage, not the treasurer’s office.

“We weren’t short of cash,” Padilla said in a Journal interview. “That’s a figment of someone’s imagination.”

In any case, a series of depositions obtained by the Journal – including Zdunek’s – offers new insight into the investment meltdown and the state investigation that followed.

They show how close the county came to running out of money and why state investigators ultimately focused on two brokers doing business with the county.

They also show that state investigators believed Padilla, the former county treasurer, and Manny Ortiz, the current treasurer, were in over their heads and that brokers didn’t do enough to keep them from investing so heavily in long-term bonds.

Some of the brokers, in fact, had a “very close relationship” with Padilla, offering gift cards to steak houses and the like, one investigator said. Padilla, in turn, says there was no preferential treatment.

The depositions were taken as part of the state Securities Division’s attempt to suspend two of the brokers and their companies.

‘Very evasive’

The state investigation was triggered by a Journal article in October 2013, outlining concerns over how Ortiz and his investment officer, Padilla, had invested the county’s money.

Agents in the Securities Division began interviewing county officials and demanding documents.

Padilla and Ortiz weren’t particularly cooperative, according to a deposition by Mark Anthony Pinto, special agent in charge of the Securities Division.

At one point, Padilla provided a list of investment brokers but “crossed out probably half of them” so they couldn’t be contacted, Pinto said.

Padilla, in a Journal interview, said he crossed out the names of brokers the county wasn’t working with anymore to be helpful. He and Ortiz insist that they were completely cooperative with the state.

Pinto, in the deposition, disagreed.

Padilla was “very evasive in answering the questions, and both he and Manny weren’t the most forthcoming with documents,” he said.

Pinto also made it clear that he believes Padilla was the one in charge, even if Ortiz held the title of treasurer, an elected position.

Padilla himself served as treasurer from 2005 through the end of 2012. He couldn’t run for re-election in 2012 because of term limits.

But he became the investment officer once Ortiz won election. Ortiz had been the investment officer under Padilla, so the two essentially just traded jobs after the election.

“Everyone likes Manny. He’s a nice guy,” Pinto said. But “the dynamic between the two clearly left Patrick Padilla in charge, regardless of what title anyone had.”

In a written statement to the Journal, Ortiz said that’s not true.

“Make no mistake; I have always been in charge of my office,” he said.

‘Day trading’

In any case, county officials outside the treasurer’s office feared the treasurer had invested too much of the county’s cash in long-term bonds. The bonds provided a good rate of return, but the strategy – Pinto called it a “one-trick pony” – also meant the county didn’t have easy access to the money, unless it sold the bonds early.

Depending on market conditions, the county might actually make money doing that – selling bonds for more than they were bought for – but there was also a risk of loss, that the bonds would be sold for less.

The county portfolio began to lose value. The treasurer’s office routinely bought and sold bonds before they reached maturity, one investigator said.

“It appeared to me that Bernalillo County, through their broker-dealers, was day trading in long-term bonds,” Shawn Beck, a senior special agent, said in a deposition. “They were buying them to make a quick buck and then would turn around and sell them again.”

The county was “gambling with the fact that the bonds would be called” – a procedure that could help them avoid losing money, Beck said.

That’s not accurate, Padilla maintains.

“The county is not doing day trading,” he said. “Whoever said that is crazy. They don’t know the bond market.”

‘Overextended’

In depositions, county officials offer conflicting testimony on why the county invested so heavily in medium- and long-term bonds.

There was talk of a check deposited in the wrong account and arguments over whether someone had made an accounting mistake, leading the treasurer’s office to think the county had more money to invest than it actually did.

In any case, the treasurer’s office plowed more of the county’s money into longer-term investments in early 2013, then-Deputy County Manager Teresa Byrd said.

By one telling – provided in a deposition by an accounting manager – a bank account that should have held $30 million to $40 million, at one point, held perhaps only $9 million or in the low teens.

In 2013, “it was becoming clear that we were a little overextended,” accounting manager Chris Sanchez said in a deposition.

Gift cards, VIP seating

State investigators eventually shifted their focus away from Padilla and Ortiz. Instead, agents examined who was doing business with the county.

Padilla “didn’t come up with this by himself,” Pinto said.

Beck put it this way: “I would say he didn’t understand what he was doing.”

In sales and trades, Pinto said, the treasurer’s office “looked like they favored certain brokers, and those brokers did have a responsibility, if I’m selling a lot of the same product, to make an attempt to correct that action, or at least to make sure there’s a caveat that’s part of the record.”

He believes a few brokers even stopped selling to Padilla or at least advised him that he needed to “watch out.”

Beck said he reviewed emails from brokers to the county that raised questions.

“It’s obvious that there was a very close relationship between some of the broker-dealer agents and Mr. Padilla,” Beck said. “There were offers of gift cards to steak houses, fancy steak houses in one case.”

There was also talk of tickets and VIP seating at sporting events and sponsoring holes at Padilla’s charity golf tournament, Beck said.

“There were things like that that struck me as being, you know, something that wasn’t kosher, if you will, on face value,” he said.

But there was no “specific evidence” of criminal activity, Beck said.

In charge

Padilla, for his part, said he understood what he was doing – and that he won praise from county commissioners and other government finance officers for his handling of public money. State investigators would have had a different view if they had talked to other brokers, he said.

As for preferential treatment, Padilla has said that brokers knew he had a charity golf tournament, but no one was treated any differently based on participation.

Ortiz said the treasurer’s office made $86 million in investment income over the years – far more than the recent losses and a sign of his strong grasp of permissible investments.

Proposed penalties

The investigation culminated with a proposal in November last year to suspend brokers Thomas Wayne Hayes and Royce O. Simpson and to impose fines. At the time, Hayes worked for BOSC Inc., parent company of Bank of Albuquerque, and Simpson worked for Oppenheimer & Co. Inc., according to the state.

Oppenheimer has since agreed to pay $215,000 and revise some internal policies as part of a settlement with the state.

The state last year alleged that the brokers and their companies didn’t verify that the investments they sold were suitable for Bernalillo County.

They had no good reason to believe that Padilla, Ortiz or a county investment committee could independently evaluate the risks of the investments and overall strategy, the state said in a pair of notices sent to the brokers and their firms.

The brokers and companies, in turn, have fought the proposed penalties and related litigation.

They’ve hired prominent attorneys, including Mickey Barnett, a former National Republican Committee member, and Paul Bardacke, a Democrat and former New Mexico attorney general.

Brokers fight back

In depositions, Colin Hunter, an attorney in the Barnett firm representing Oppenheimer, offered some insight into the brokers and firms’ defense.

He repeatedly suggests that Padilla was confident, in charge and experienced enough as treasurer to make his own decisions.

“It really wasn’t consistent with his style to really listen to anybody, and Patrick was going to do what Patrick was going to do,” Hunter said as part of a question to one county official, who agreed with the characterization.

Hunter also suggests in questioning that the brokers weren’t serving as investment advisers and had no way of knowing the county’s cash-flow needs, unless the county told them.

Finally, Hunter points out in questioning that a report by an outside firm determined that the county portfolio was “invested in permissible securities” under the investment policy in place at the time.

Another attorney – Randle Henderson, who represents Simpson, one of the brokers – got Beck to acknowledge that the brokers who did lots of business with the county may have won the work by offering the best price.

Likewise, a court filing by Hayes and BOSC said the work they won came through competitive bidding and a process sanctioned by county policies.

Blaming brokers for the investment losses is merely an attempt to find a “scapegoat” for the county’s own miscalculations and decision to sell off “investment grade bonds in a panic,” BOSC and Hayes said in a court filing.

Criminal charges possible

Today, the county has a more-stringent investment policy. Padilla no longer works for the county.

The state action against the brokers and their firms remains pending except for Oppenheimer, which settled with the state.

And as recently as August, when the depositions were taken, the state also revealed that there could be administrative action against other brokers, or even criminal charges.

“I have not found any evidence that New Mexico criminal law has been violated yet,” Beck said, “but if I do, it will be pursued.”

In any case, Pinto said, “the county got awful close to having nothing in their coffers.”

“Money in the bank is money in the bank,” he said. “There’s a lot of things you can fake, but that’s not one of them.”

Journal staff writer Scott Sandlin contributed to this report.