ORANGE COUNTY IN BANKRUPTCY : 4 School Districts Negotiating to Avoid Default on $200 Million in Notes : Finance: Group, which borrowed heavily to cash in on county pool yields, says lawsuit is possible if the talks break down.

Four local education districts that borrowed heavily to invest in Orange County’s high-flying portfolio are negotiating with the investment firm that underwrote their controversial bond issue to help them avoid defaulting on their debt June 13.

Sources familiar with the discussions said the districts are pressuring Rauscher Pierce Refsnes Inc. by threatening to sue the firm for pushing the districts into a deal without properly disclosing risks that could end up costing them $20 million.

But a spokeswoman for the firm said Wednesday that Rauscher is simply “working with the school districts in developing financing alternatives that would assist them in meeting their obligations.”

The North Orange County Community College District, the Orange County Department of Education and the Newport-Mesa and Irvine unified school districts issued a total of $200 million in taxable notes last June purely to speculate in the county’s investment pool, hoping to repeat their success in a similar deal the previous year that earned about $1 million in interest for each district.

But when the pool and the county went bankrupt Dec. 6, the four districts landed in perhaps the most precarious position of any of the local agencies that invested in the county-run fund.

With a June 13 deadline looming for repayment of the $200 million, and the settlement agreement between pool participants and the county leaving the districts $20 million short, districts want Rauscher to plug the hole.

“We haven’t [filed a lawsuit] and we’d rather not, and they’d rather not be sued. So we’ve recognized that we’ve got some mutual interests,” said Marc Winthrop, an attorney representing three of the districts. “They want to help us with a business solution.”

The districts have separately negotiated bridge loans from other local agencies that would enable them to pay their debts when due, even if the county’s promised repayment of 13% is delayed.

Winthrop refused to reveal the details of his discussions with Rauscher, a Dallas-based company, but said they have had several face-to-face meetings and exchanged numerous “term sheets” outlining a proposed deal. He said he expects to “wrap it up” within two weeks.

“We’re talking. We’re not there yet. We’re chatting. I’m not at liberty to discuss the nature of the proposals,” Winthrop said. “At this point, it’s very preliminary. We’ve been kicking things back and forth. We go back and forth and back and forth.”

Katherine Butts Warwick, the attorney representing Newport-Mesa Unified, did not return calls for comment. Newport-Mesa Supt. Mac Bernd declined to comment, as did Paul Reed, deputy superintendent for business services at Irvine Unified.

John Nelson of the County Department of Education and the college district’s Gilbert Moreno could not be reached.

The school districts’ taxable note issuance is among the most controversial deals connected to Orange County’s financial crisis, because the districts borrowed the $200 million solely for the purpose of reaping profits from the county pool.

Winthrop indicated that he was raising questions about the appropriateness of the investment as leverage in negotiations with Rauscher.

“We’re examining any liability on Rauscher’s part,” he said. “This product was brought to us. None of my clients went out and said, ‘Geez, we’ve got this great idea.’ Rather, it was [Rauscher broker] Ken Ough coming to the districts and saying, ‘Have I got a deal for you.’ ”

But B.J. French of Inter-Regional Financial Group, Rauscher’s parent company, offered a conflicting view.

“RPR does not believe it has any liability to the school districts in connection with these taxable note offerings,” she said in a statement issued Wednesday in response to a Times inquiry. “The 1994 taxable notes were initiated by the school districts themselves (not RPR) in light of the success of their 1993 offerings and were actively encouraged by county officials.

“The school districts worked directly with the county and their own financial advisers to assure themselves that the taxable-note transactions were still prudent despite the changed interest-rate environment,” French added.

Times staff writer Debora Vrana contributed to this story.