ORANGE COUNTY IN BANKRUPTCY : Judge May Hold County Officials in Contempt : Crisis: Failure to pay lawyers amounts to obstruction of justice, he says. Meanwhile, a criminal probe widens.

An Orange County judge threatened Friday to hold the Board of Supervisors and other top officials in contempt and said their failure to pay private lawyers assigned to major murder cases amounts to obstruction of justice.

Superior Court Judge David O. Carter lashed out after defense attorneys complained that investigators and expert witnesses also have not been paid for upcoming trials, including the cases against a Dana Point computer consultant accused of poisoning his wife and an ex-convict charged with sexually assaulting and repeatedly stabbing a young woman outside a nightclub in Orange.

Carter said the courts have been “exceedingly gracious” by giving the county time to resolve its financial issues in the wake of the Dec. 6 bankruptcy.

“It seems to me now we can’t delay too much longer,” the judge said during a court hearing for Edward Patrick Morgan, who is awaiting trial in the nightclub murder.

Supervisors were hit with more bad news as the District Attorney’s criminal investigation into the county’s financial collapse moved into their own offices. Three aides to Supervisors Gaddi H. Vasquez, Roger R. Stanton and William G. Steiner have been summoned to appear before the Orange County Grand Jury.

A fourth aide--Santa Ana councilman Robert Richardson--confirmed Friday that he was questioned by two investigators this week about his dealings with the county treasurer’s office. Richardson, who works for Stanton, declined to elaborate.

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The district attorney’s inquiry apparently is focusing on whether any brokerage firms received county business in exchange for campaign contributions or gifts to county officials, sources close to the investigation said. Investigators want to find out what the aides knew about the county’s investment fund before it collapsed last month and how frequently they dealt with then-Treasurer-Tax Collector Robert L. Citron.

County sources said one of the aides, Dean Olsen, who works for Steiner, was approached by investigators Wednesday, but attorneys for the Bryan Cave law firm, which is representing members of the Board of Supervisors, advised county aides not to talk without a lawyer present. The other two aides subpoenaed were Kathleen Freed, who also works for Stanton, and Tiffany Kretzschmar, who works for Vasquez.

On Thursday, authorities were back with subpoenas compelling the three aides to appear before the grand jury next week.

In other developments Friday:

* Teachers in the Irvine Unified School District, which stands to lose millions because of the county’s financial collapse, said they placed a newspaper ad seeking donations of paper, pencils, even cleaning supplies. Officials in the much-touted district have already discussed selling their headquarters and possibly using parent work crews to help with light school maintenance work.

* Standard & Poor’s, a major rating agency, said investor confusion and concern resulting from Orange County’s bankruptcy filing could cost governments across California millions of dollars in increased borrowing costs for short-term debt.

Still, the ratings agency expressed confidence that Orange County will be able to meet $4 million in interest payments in February if a U.S. Bankruptcy Court judge approves its plans for disbursing money in the portfolio, which lost $2.02 billion in the past year.

Standard & Poor’s also predicted the court will release to local cities some $175 million in property taxes that was collected before the county declared bankruptcy.

* The county and Merrill Lynch & Co. argued over what happened to $800 million. County officials expressed concern that Merrill Lynch on Thursday sold off $800 million in securities it held as collateral for loans to the investment fund. But Merrill contended that no such sale had occurred.

The county maintains that Merrill should still hold $1 billion in collateral, while the company insists that it only has $235 million left. Merrill said all of its collateral sales were approved by Salomon Bros, the county’s financial adviser, and that it never held as much collateral as the county thought.

The issue is slated to be resolved Tuesday in bankruptcy court.

* The brokerages of Goldman, Sachs & Co. and A.G. Edwards were selected to underwrite new debt for the county whenever officials decide to refinance the losses, county spokeswoman Sandra Sternberg said. No dollar amount has been set for any new debt, although several brokerages who vied for the business had recommended borrowings in excess of $900 million.

* Officials from the Orange County Employees Retirement System are attempting to sever ties from the county in the wake of the financial crisis. In a series of letters to county officials, the agency’s Administrator Mary-Jean Hackwood requested that the county relinquish payroll and other operations it handles for the retirement agency.

Hackwood is demanding that the county continue making financial contributions to the retirement fund. County officials, who have halted the payments because of the bankruptcy, say they will resist any attempt by the retirement board to break away from county authority.

* A new coalition of county labor groups said they will sue the county Tuesday in an effort to halt hundreds of layoffs. Attorney Marc Beilinson said the coalition will seek an injunction to stop the firings and plans to argue that the county has violated collective bargaining agreements, state law and federal constitutional rights of due process.

Union leaders criticized the county for hiring more than 150 new employees since a hiring freeze went into effect Dec. 8, saying the move would bolster their lawsuit. Beilinson said county officials chosen to pay hundreds of thousands of dollars to hire a public relations firm while “treating the employees poorly.”

“We want to get to court so we make sure that no worker goes out the door,” said Tobye Lovelace, spokeswoman for the Orange County Employees Assn., which represents more than 11,000 of the county’s 18,000 employees.

County officials suspended provisions of the labor contracts that protect senior workers from layoffs and say they were justified because the county faces an emergency. But Beilinson contends that the current crisis is not an emergency under the state law that grants labor due process and bargaining rights.

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The labor coalition met with county officials Thursday in an effort to get their contracts reinstated and stave off legal action, but said they were rebuffed. County attorneys also told the coalition they they would not support labor’s efforts to be recognized as an official creditors committee in bankruptcy court, Beilinson said.

As labor unions moved forward with legal action, Judge Carter criticized the logjam in criminal courts since the county halted payments to many private attorneys. Carter threatened to hold county officials in contempt after a defense attorney for murder suspect Edward Morgan said he could not move forward with the case because his investigator had not been paid since the county’s bankruptcy.

Carter said he would review the issue at a hearing next Friday and would consider holding a contempt hearing in February to hold the supervisors accountable, along with Chief Administrative Officer Ernie Schneider and Auditor-Controller Steve E. Lewis.

“Hopefully, this will cause some communications and some funds to flow,” said Carter, who presides over felony arraignments and oversees the flow of criminal trials in the Superior Court. “If not, I propose to set it for a contempt proceeding.”

As it turns out, the county had placed money in a trust fund for Morgan’s case on Thursday-- but defense attorney Julian Bailey said he was never notified. The status of other cases was uncertain.

Alan Slater, the court’s executive officer, said the county had nearly $700,000 in pending defense bills and has begun doling out checks in recent weeks, although totals were not immediately available Friday.

“That just shows you what a state we are all in,” Slater said. “We don’t know whether anyone received a check until they call us up and say ‘Hey, I got paid.’ ”

Judges around the county have been postponing cases again and again--delays that ultimately cost the county more money--because investigators and expert witnesses have been reluctant to take on work unless they can be sure they will be paid.

In another high profile case, defense attorney George A. Peters Jr. sought a Jan. 6 court order demanding the county put funds aside for investigation and witness fees in the Richard K. Overton murder case. Overton has pleaded not guilty to poisoning his wife and is scheduled to go on trial next month.

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In another case involving a bank robbery suspect, Judge Luis A. Cardenas ordered county officials before him Tuesday morning to explain why defense costs have not yet been paid. A county attorney appeared before Cardenas Thursday to say the county could not pay because it would violate bankruptcy rules to pay any bills accrued before the bankruptcy.

Slater said he does not understand the county’s argument, noting that some of the defense team--including expert witnesses and investigators--have already been paid for work performed before Dec. 6.

The county’s bankruptcy attorney said Friday it remains unclear whether bills will be paid in full for defense work performed before the county declared itself insolvent, or whether defense attorneys, investigators and expert witnesses will have to get in line with the county’s other creditors.

“It may be a matter of discretion, it may be considered an ordinary vendor claim,” said William Bennett, who stressed that the issue remains to be resolved. “The board hasn’t decided that yet. There are a lot of other people who aren’t being paid until the county works out a plan of adjustment.”

On Thursday, the county sued Merrill Lynch, which handled much of its bond business before the bankruptcy, blaming the Wall Street brokerage for the financial collapse. Brokerage officials have denied any wrongdoing and say that county officials charted their own financial course.

Bennett said Friday that Merrill Lynch brokers participated in the development of a investment strategy that resulted in the county “incurring debt” of $5,000 for every man woman and child in Orange County. The actual losses translate into about $800 for every county resident, he said.

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Meanwhile, a special senate committee examining the investment fund’s collapse finalized its list of attendees for Tuesday’s hearing in Sacramento.

Former Treasurer Citron is expected to make his first public comments during an appearance before the the state Senate Special Committee on Local Government Investments.

After opening statements from state senators Lucy Killea (I-San Diego) and William A. Craven (R-Oceanside), Citron and assistant treasurer Matthew R. Raabe are scheduled to speak, followed by comments on oversight of the fund by supervisors Vasquez, Stanton and county Auditor-Controller Lewis.

After lunch, representatives of the Newport-Mesa Unified School District, Placentia-Yorba Linda Unified School District, and the cities of Mountain View and Westminster--all investors in the fund--are scheduled to testify about how the financial crisis has hurt them.

The hearing concludes with testimony from those who represent brokerages that underwrote or marketed many of Orange County’s securities and bonds, including Michael Stamenson, the Merrill Lynch broker who handled much of Orange County’s business, and Jeff Leifer, the head of a Santa Monica firm that earned more than $1 million in recent years as a financial adviser for Orange County’s bond deals.

Both Leifer and Stamenson have been subpoenaed by the U.S. Securities and Exchange Commission in its investigation into the relationship between government officials and various brokers.

Citron and Raabe are expected to be asked questioned about how the investment fund was managed, the strategy that was used in getting high rates of returns, and exactly what caused the fund’s losses. They are also supposed to be questioned as to what economic indicators they used to make investments and what specific reports led them to believe that interest rates would go down.

Panel members are expected to ask county supervisors about their level of oversight of the fund, which dropped $2.02 billion in value last year. Board members may also be asked whether they approved Citron’s use of reverse repurchase agreements, derivatives and other long-term notes that led to losses when interest rates rose.

Times staff writers Chris Woodyard, Lee Romney and correspondent Shelby Grad contributed to this report.

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