Major O.C. Win Close at Hand in Bond Suit

SANTA ANA — In what would become the first major victory in Orange County’s campaign to recover the $1.64 billion in securities trading losses that drove it into bankruptcy, the county has tentatively agreed to drop its lawsuit against its former bond lawyers in exchange for a payment of as much as $50 million, officials said.

But the proposed settlement with LeBoeuf, Lamb, Greene & MacRae is being held up by the North Orange County Community College District, which is a party to the county’s lawsuit and has a separate legal dispute with the law firm.

During the past few months, attorneys for the county and LeBoeuf have held a series of secret bargaining sessions to hammer out the settlement, which could amount to one of the largest damage settlements ever by a law firm. Sources said the firm’s malpractice insurance would cover any payment up to $50 million.

A payoff by the law firm would allow cities, schools and special districts to recover a portion of the hundreds of millions of dollars they lost when risky securities purchased by former Treasurer-Tax Collector Robert L. Citron plunged in value in the fall of 1994, triggering the nation’s largest bankruptcy by a government entity.

After filing for bankruptcy in December 1994, the county, acting on behalf of the nearly 200 government agencies that lost money in the county’s investment pool, sued LeBoeuf in federal court for $500 million.

The county alleged in its lawsuit that the firm failed to alert county leaders to Citron’s high-flying investment strategies, even though LeBoeuf’s partners had intimate knowledge of the treasurer’s activities.

LeBoeuf’s lawyers have indicated they will settle the county’s suit only if the community college district drops its separate damage suit against the law firm, according to officials close to the negotiations.

The college district is now coming under heavy pressure from other agencies to drop its suit and allow investors to recoup some of their losses.

The community college district filed an $11-million suit against LeBoeuf last year, also accusing the firm of not warning college administrators about Citron’s risky investments when the law firm helped the district borrow $72 million to pour into the investment pool in 1994.

A trial of the district’s suit against LeBoeuf is set to begin Feb. 27 before a San Diego Superior Court judge.

School district trustees have so far resisted the county’s requests that they drop their separate state lawsuit, saying they should have the right to seek additional compensation.

“The question we would ask is: Why is the county willing to settle for less than 10% of its claims . . . and limit itself solely to insurance proceeds without having LeBoeuf’s partners pay a penny from their rather sizable annual profits?” said Edmond M. Connor, an Irvine attorney for the college district.

Gary M. Cohen, a San Francisco attorney representing LeBoeuf, declined to comment.

The stalemate has prompted some city and county officials who support the settlement to begin lobbying the district to drop its suit.

Irvine City Manager Paul Brady, who heads a committee representing pool investors, said he has sought the lobbying clout of state officials, including Marian Bergeson, Gov. Pete Wilson’s education secretary who joined the Orange County Board of Supervisors the month after the bankruptcy was filed.

Other city, school and county leaders have also requested Bergeson’s help in urging the district to drop its suit, Brady said.

“We are putting pressure where it needs to be put so we can get this solved and get everyone off the hook,” Brady said. “We’re trying to encourage the district to come to the table.”

Brady declined to discuss details of the negotiations with the law firm, but said any settlement would provide significant revenues for school districts, as well as other investors.

He said that a settlement with LeBoeuf “would have far-reaching impacts beyond this one case,” he said. “It would help our cause tremendously” in other civil cases the county has filed against Merrill Lynch & Co, and other Wall Street brokerages and professional firms.

Bergeson said Wednesday that she has spoken with the president of the college district and “suggested that we get together without attorneys and see if we can get on with this.”

Bergeson said the college district’s separate lawsuit isn’t in keeping with the original bankruptcy recovery plan, which called for all investors to share equally in any proceeds from civil litigation.

“This holdout has serious impacts on other school districts,” she said. “We really want to get this concluded.”

But Connor, the college district’s attorney, said his clients would not recoup all their bankruptcy losses through the settlement, which is the goal of trustees.

“Instead of applying pressure on the district to accept less than it is entitled to recover, the county should join with the district in applying pressure to LeBoeuf to pay off all legitimate claims,” Connor said.

Because it borrowed money to place in the pool, the district’s losses were at least $7.2 million higher than they might have been, and that does not include the interest and other costs the district incurred.

Overall, the district figures it is out nearly $16 million, even though it has recovered 90% of the $86 million it had on deposit in the pool at the time of the bankruptcy. It has also been promised $2.1 million of the $30 million Merrill Lynch paid the county to scuttle the district attorney’s investigation of possible criminal wrongdoing by Merrill executives.

The county’s settlement with LeBoeuf would mark a milestone in the county’s recovery from bankruptcy, but would not come close to making whole the 200 agencies that lost money in the county’s investment pool.

Altogether, depositors lost $1.64 billion when the pool’s investments in interest-sensitive securities began plummeting in value as the Federal Reserve hiked interest rates in the spring and summer of 1994. Under a bankruptcy recovery plan approved by all of the depositors, school districts were given about 90% of their pre-bankruptcy account balances, while cities and special districts received about 80%.

The investment pool depositors agreed that they would get their unpaid balances only if the county was successful in its litigation against Merrill Lynch & Co., the LeBoeuf law firm, and other parties it blames for causing the financial crisis.

School districts would appear to be the biggest winners from any LeBoeuf settlement. Under the recovery plan, schools would receive the first $55 million of any civil settlements. After that, other investors, including cities, the county and special districts like the Orange County Transportation Authority and Sanitation Districts of Orange County, would get a share.

Earlier this year, local schools received about $27 million of the $30 million Merrill Lynch paid to avoid criminal charges related to the bankruptcy.

But the districts are still due about $80 million--with individual school systems still out from several hundred thousand to several million dollars.

Educators said they need the money to bring computers into classrooms, repair aging buildings and make room for the state’s class-size reduction program.

The county’s lawsuit against LeBoeuf focused in part on law firm partner Jean Costanza, who worked closely with the treasurer’s office on county borrowings.

The suit alleged that Costanza knew of the enormous risks that Citron was taking as well as the potentially “disastrous consequences of a rise in interest rates,” but never disclosed that information to the public and Board of Supervisors. When the investment pool sustained financial losses, she did not disclose that either, according to the suit.

* APPEAL TO JUDGE: Merrill Lynch asks that part of O.C. suit be thrown out. A13