BANKING/ FINANCE : Cost of Regulators’ Determination Is Not Lost on Law Firm

Federal regulators have been warning in recent months that everyone is suspect in their investigations of failed savings and loans. The giant Los Angeles law firm of O’Melveny & Myers has found just out how stubborn regulators can be.

The firm has been fighting a malpractice lawsuit that regulators filed over two real estate syndications that its Newport Beach office handled for a subsidiary of the now-defunct American Diversified Savings Bank in Costa Mesa.

American Diversified was a complex operation that acted more as a development and investment firm than an S&L.; Regulators seized it in February, 1986, and closed it two years later, refunding a record $1.14 billion to depositors.

After poring over mismanaged files and reconstructing transactions, regulators decided to unwind dozens of real estate syndications and launched lawsuits against former owners and others, including O’Melveny & Myers.

The FDIC contends that the law firm was negligent because it failed to say in a private offering statement that the S&L; was financially troubled and having problems with regulators.

So far, the firm has won a non-binding arbitration decision and, after regulators rejected that and sued, won dismissal of the suit in U.S. District Court in Los Angeles. Now, the Federal Deposit Insurance Corp., which has taken over the litigation from a former thrift agency, has appealed to the 9th U.S. Circuit Court of Appeals.

The cost of such dogged determination is not lost on the law firm.

“I guarantee they’ve spent more chasing us than they could get out of us,” said Jerry W. Carlton, managing partner O’Melveny & Myers’ Newport Beach office.

The firm estimates that the total amount involved in the two transactions is no more than $4 million and that any actual loss is about $100,000. Regulators could not be reached for comment.