2 Lawyers Get $3.8-Million, End Dispute : Insurance: An attorney who is the target of a federal insurance fraud inquiry and his ex-client are to share the settlement, which resolves six state and federal lawsuits.

A lawyer who is the target of a federal insurance fraud investigation will share $3.8 million in insurance funds with a former client in a settlement that will end years of bitter litigation between them.

The settlement will give Lynn B. Stites, the focus of the criminal investigation, about $2.3 million. His ex-client, Leonard M. Ross, will receive $1.5 million, according to court documents and sources familiar with the settlement. Neither man admitted any liability.

Stites, who lives in Bell Canyon in eastern Ventura County, and Ross, a Beverly Hills lawyer and businessman, are fierce litigators. Insurance companies have paid them millions of dollars in legal fees and damages in recent years. The settlement resolves six state and federal court lawsuits. It was signed last month and filed in Los Angeles Superior Court, but some terms were not made public in court files.

They were obtained from informed sources who would not speak for attribution. Lawyers for Ross and Stites and Cigna Cos., one of the insurers, declined comment.

The Stites-Ross dispute arose from their involvement in the Willow Ridge litigation in Los Angeles Superior Court, a Byzantine investment fraud case that began in 1978 and is not quite over yet. For several years before he was dismissed from Willow Ridge, Ross was a defendant and Stites was one of his lawyers.

Insurance companies spent nearly $18 million defending Ross under policies issued to businesses in which he was involved. Some insurers balked at paying for Ross’ defense, and, with Stites as his lawyer, he filed a series of lawsuits accusing them of acting in bad faith toward him.

Ross ultimately received at least $20 million in bad-faith settlements and judgments from more than a dozen of the insurance firms. He fired Stites in 1984, when the money began to come in.

Ross also sued Stites for fraud. He accused his ex-attorney of creating a “Stites network” of attorneys, who systematically defrauded insurers in Willow Ridge and other cases--allegations now being pursued by federal prosecutors.

Stites also sued Ross for fraud, contending that his former client had fired and sued him merely to avoid paying Stites an agreed-upon percentage of the bad-faith settlements. In a court document, he called Ross a “professional litigant . . . who will do anything for money.”

Sources said the settlement included $2 million from INAPRO, a unit of Cigna Cos. that had insured Stites’ law corporation. The other $1.8 million is principal and interest from special accounts set up early in the dispute by two other insurers.

Ross and Stites claimed the funds and the companies, CNA Insurance and American Home Assurance Co., put them aside pending a court ruling on their claims.

Stites still faces trial in a fraud and racketeering lawsuit filed against him by USF&G;, which has been delayed and now is scheduled to start Tuesday in U.S. District Court in Los Angeles.

In addition, Stites is the key target of a massive federal inquiry of Los Angeles-area lawyers, whom federal prosecutors have called “the alliance.” The investigation is being conducted by postal inspectors and the U.S. attorney in San Diego, the site of some court cases in which insurance companies purportedly were defrauded.

Prosecutors have said about 30 people are under investigation, most of them lawyers from the San Fernando Valley, West Los Angeles and Beverly Hills.