Senators Question Popejoy’s N.Y. Trip : Bankruptcy: Relations strained by O.C. official’s meeting with Merrill Lynch chairman after canceling a scheduled Sacramento visit on grounds of illness.

Orange County Chief Executive William J. Popejoy may have damaged his relations with the special state Senate committee investigating the county’s bankruptcy by informing committee members he was too ill to meet with them last week, then flying to New York for secret settlement negotiations with Merrill Lynch & Co.

“It’s never wise to lie to a Senate committee,” said Sen. Quentin Kopp (I-San Francisco), a committee member. “It certainly hurts his credibility.”

Scott B. Johnson, chief counsel for the committee, said lawmakers and their staffs were “a little puzzled” by Popejoy’s unwillingness to tell them the true reason for his cancellation.

“I think that’s an odd story to have told us,” Johnson said, referring to Popejoy’s excuse that he was too ill to appear before the committee last Tuesday, the same day that he flew to New York.

Popejoy could not be reached for comment.

The Times reported Wednesday that Popejoy had a meeting last week with Merrill Lynch Chairman Daniel P. Tully to see if there was any common ground to settle the county’s $2.4-billion lawsuit against the firm.

The county blames Merrill Lynch for its bankruptcy, contending that the firm sold longtime Treasurer-Tax Collector Robert L. Citron inappropriately risky securities, and that it illegally loaned the county more money for securities purchases than the state Constitution permits.

County and Merrill Lynch officials have declined to discuss the meeting. Sources have said, however, that the two sides are still far from settling the dispute.

“This is going to be a long battle,” said a Merrill Lynch legal spokesman, who asked not to be identified.

Meanwhile, county officials, who asked for the meeting with Merrill Lynch, are proceeding with their lawsuit against the firm and are planning to depose witnesses in late July.

On Wednesday, state senators expressed frustration at having been misled by Popejoy, especially since they had been so accommodating to the county by passing emergency legislation aimed at helping it dig its way out of the worst municipal bankruptcy in U.S. history.

Sens. Lucy Killea (I-San Diego) and William A. Craven (R-Oceanside), co-chairs of the committee on Local Government Investments, wrote a memo to other members of the panel, suggesting that Popejoy’s lack of candor calls “into question” the committee’s “rapport” with the county’s top executive.

“After being informed that Mr. Popejoy would not be able to attend the last hearing of our committee because he developed a case of the flu, we now learn that he instead traveled to New York to meet with Merrill Lynch executives, presumably to discuss a settlement of pending litigation,” the senators wrote. “We wish both Mr. Popejoy and the county a speedy recovery.”

Before he canceled, Popejoy had agreed to attend a hearing May 16. At the hearing, Wall Street money managers testified about their concerns over the possibility that Orange County would default on more than $1 billion in bond debt that comes due this summer if county voters reject Measure R--the initiative to raise the county’s sales tax by half a cent.

Capitol insiders said the meeting was orchestrated on behalf of Wall Street and Orange County officials to help win support for tax hike.

Paul S. Nussbaum, a top adviser to Popejoy, said the county’s top executive was truly fighting the flu when he canceled his appointment in Sacramento.

“We’re sincerely grateful for the efforts that were put forth by California’s state representatives in Sacramento,” Nussbaum said. “There was no intention whatsoever to shun the committee or be disrespectful in any manner. This is clearly a very serious matter for the county and required Bill’s attention despite his illness.”

Supervisor Marian Bergeson, a former state senator, said Wednesday that she thought Popejoy “was working in the best interest” of the county.

“In no way would he intend to slight the committee,” she said.

Bergeson added that she thought Popejoy’s meeting with Merrill Lynch was “a good sign that things are moving forward.” She would not elaborate on the status of the negotiations.

Orange County filed for bankruptcy Dec. 6 after losing nearly $1.7 billion from its investment pool. Many of the securities the county lost money on had been offered to the county by Merrill Lynch.

The county sued Merrill Lynch on Jan. 12 in U.S. Bankruptcy Court, alleging that the brokerage firm duped Citron into gambling public funds in highly risky securities as part of a massive scheme--charges Merrill Lynch vehemently denies.

On Tuesday, Popejoy told supervisors that the county will probably sue other defendants, including law firms, financial advisers and accounting firms that worked for the county. And, in a memo to the board, he predicted that the county may receive damages in the hundreds of millions of dollars, perhaps as much as $1 billion. However, he warned that the process could be a lengthy one.

On Wednesday, in an action that a firm spokesman called “a victory for Merrill Lynch,” U.S. Bankruptcy Judge John E. Ryan ruled that the county’s investment pool had no legal standing in bankruptcy court, casting doubt on whether the committee representing pool participants in the bankruptcy case could sue Merrill Lynch.

The committee, representing the 194 entities that lost money in the county’s investment pool, had joined the county’s lawsuit against the Wall Street firm.

Timothy Gilles, the firm’s spokesman, said “the judge found as Merrill Lynch and others contended that the Orange County investment pool was not eligible to file bankruptcy. This follows on the court’s earlier decision, holding that six of the county’s seven legal claims as pleaded were not properly filed in bankruptcy court. Today’s decision is another blow to the county’s credibility.”

* ILL RECEIVED: “Ill” O.C. executive’s trip irks legislators who had an appointment. A3

* COURT RULING: Investment pool bankruptcy filing is dismissed. A3

* RATING GAME: Moody’s, unasked, will review bonds for Eastern tollway. D1