ORANGE COUNTY IN BANKRUPTCY : Pool Settlement Plan Comes Under Attack : Payout: Two attorneys say desperate cities, schools and others were manipulated and strong-armed by county. A ‘gag order’ makes situation worse, they maintain.

Orange County strong-armed the cities, schools and agencies whose funds were squandered in the county’s failed investment pool, manipulating the bankruptcy settlement to force them to accept terms most favorable to the county, the attorney for the only dissenter on the pool participant’s negotiating committee said Friday.

The county’s manipulation extended to its insistence that legal language be included in the settlement that is tantamount to a “gag order,” said G. Larry Engel, the attorney who represents public agencies outside of Orange County, including the Northern California city of Mountain View, which has money in the pool.

The county also insisted that pool investors, as a condition to getting at least 77% of their money back, give up their rights to sue all current and former county officials, from the Board of Supervisors, which rubber-stamped last summer’s billion dollars in bond issues, to former Treasurer-Tax Collector Robert L. Citron and his assistant, Matthew Raabe, who oversaw the risky investments.

“It’s simply outrageous for government officials to use their power to benefit themselves at the expense of the people they are supposed to be serving,” Engel said. “The state has laws against self-dealing, yet the county officials who instructed their lawyers to negotiate those releases are doing just that.”

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The process, dictated by the county, compelled pool participants to negotiate secretly and in a vacuum without access to critical information to gain access to their own money, Engel said. In fact, participants were forced to sign confidentiality agreements.

The investors finally received the proposed settlement plan at the end of March. Unless Bankruptcy Judge John E. Ryan grants more time, the investors must select a payment settlement option by April 17.

County bankruptcy lawyer Bruce Bennett did not return calls for comment. But in a brief filed in the case late Thursday, Lee Bogdanoff, a member of Bennett’s law firm, argued that the settlement represents the speediest solution for pool participants to receive the bulk of their money and avoid expensive and costly lawsuits.

“Litigating a final resolution,” Bogdanoff wrote, “could easily establish new heights in the chronicles of protracted civil litigation.”

But Irvine attorney Ronald Rus, the most vocal and persistent critic of the secret process, said, “This settlement is the ultimate shake-down.”

Rus represents the Yorba Linda Water District, the Municipal Water District of Orange County, the Santiago County Water District and Fountain Valley. He added, “The county has gone out of its way to prohibit people from speaking against it--what kind of government is that?”

The gag order embedded in the agreement requires those who accept the terms “to cooperate” and “not to hinder or interfere with any proceedings” to get the judge’s approval of the deal. Those who raise objections, Engel said, could be cited for a “breach of contract,” the effect of which would be to terminate the agreement and force them to sue to recover any funds.

The county has also refused to share critical information with the committee, including about 250,000 documents exchanged between the county and Merrill Lynch & Co. as part of the county’s lawsuit against the brokerage firm. That information is currently concealed by a protective order issued by Ryan.

The contents of those documents, Engel and Rus argue, may significantly influence the ability of the pool participants to choose the appropriate settlement option.

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Most participants are expected to choose option A and receive at least 77% in cash. Under that option, schools would also receive 13% and others 3% in what county negotiators describe as “good as gold” recovery notes that can be converted to cash. The next 9% would come from proceeds of the county’s lawsuits against Merrill Lynch & Co. For the remaining 10% for schools and 11% for others, the county promises to make its “best efforts” to find a way to pay but offers no concrete plan or timetable.

Under option B, participants get 77% in cash but keep their rights to sue for the balance as well as damages. Finally, participants who want can ignore those options and litigate.

If the county fails to make the recovery notes convertible to cash by June 5, participants can switch to option B. For the settlement plan to be approved by Ryan, at least 80% of the participants representing 90% of the assets must agree to one of the first two options.

Engel said he plans to ask the court to extend the deadline for deciding which option to choose until May 2, when the investors have had more time to digest the 76-page settlement and can raise legal issues at a hearing scheduled that day.

Some pool participants also are trying to arrange a full meeting of the nearly 200 agencies for next Wednesday, Engel said.

The county’s penchant for secrecy and its take-it-or-leave-it tactics have helped obscure key facts about what Engel calls “the massive fraud” by county officials.

“This isn’t one of those hypothetical situations open to dispute--you had covert budget deficits in Orange County and misappropriation of funds to cover them,” he said.

Armed with a growing body of evidence that they were defrauded, including the recent findings of the state auditor that Citron broke laws and “violated the public trust”--a fact not disputed by the county--strengthens the case made by those planning to take Option B that they would prevail in lawsuits against Merrill Lynch and others.

Some settlement opponents, Rus said, are preparing to circulate a letter encouraging participants to take Option B and join a class-action lawsuit instead of assigning those rights to the county and letting officials off the hook. Choosing Option B, the letter states, “provides you with the same 77% cash distribution and the right to take other actions on your own, or in conjunction with others, to collect the balance. . . . You no longer need to rely on or trust the county to act in your interests.”

While Engel is critical of the process, he said the committee did the best it could with the limited information, operating as it did with the county controlling the money of schools and agencies certain to go broke if they do not go along with the county’s demands.

“I don’t think any of the county’s activities have been by happenstance,” Engel said. “I think they have a very good sense of tactics and they’ve played their hand very well.”