Flurry of O.C. Lawsuits Expected Against Firms : Bankruptcy: Auditors, bond counsel among targets. Expanding legal action is seen as key to recovery.

Orange County’s legal advisers are on the verge of bringing massive lawsuits against a wide array of firms--including a former auditor and bond counsel--that they blame for triggering the largest municipal collapse in U.S. history.

At the top of the “short list” of litigation targets is KPMG Peat Marwick, whose audits county officials criticize for failing to warn of impending financial calamity.

Also on the list are CS First Boston Corp. and Nomura Securities International, prominent firms that sold risky securities officials believe helped precipitate $1.7 billion in losses in the county-run investment pool.

The county also is plotting legal strategy against LeBoeuf, Lamb, Green & MacRae, a Los Angeles legal counsel on a controversial $600-million bond offering that pumped borrowed money into the county’s investment scheme but left critics complaining of woefully inadequate disclosures.

The additional lawsuits would come on top of a pending $2-billion suit against Merrill Lynch & Co., a heavy seller of securities to Orange County and No. 1 on the county’s list of those to blame for its current bankruptcy. Like Merrill Lynch, representatives of Peat Marwick contend they did nothing to contribute to the bankruptcy.

A Nomura representative did not return phone calls. A spokesman for First Boston said he couldn’t comment because “we don’t know a thing about it.” A partner at LeBoeuf also said she was unaware of any imminent legal action.

The litigation efforts are taking shape as an Orange County bankruptcy recovery plan appears to be gaining support locally and in the state Legislature, raising the prospect that the county could emerge from Chapter 9 bankruptcy by mid-1996.

“You’re going to see lawsuit after lawsuit, boom, boom, boom, the day after this recovery plan is in place,” said one county official, who declined to be identified.

Now more than ever, the county’s full recovery is riding on litigation success.

A key element of the county’s recovery plan calls for using litigation proceeds to repay more than $800 million to cities, schools, special districts and others who lost money in the county’s ill-fated investment scheme. If the county fails to win in court, those entities would not get an additional cent.

“I feel that the best likelihood for recovery of monies is to expand the suit to include other culpable parties, rather than just Merrill Lynch,” Supervisor William G. Steiner said. “This potential could result in a global settlement, where the burden is spread among many entities: investment bankers, bond firms, auditors and others.”

Assistant County Counsel Laurence M. Watson said the county could not discuss any pending legal action until it is filed.

But sources said Friday that a flurry of suits is expected in coming weeks.

An official of one prospective defendant said the firm felt “abused” by news of a potential lawsuit and criticized the county for tarnishing the company’s name.

“It’s pretty clear what Orange County is doing. They’re looking for $800 million,” said John R. Miller, Peat Marwick’s national director of governmental services. “They’re driving toward deep pockets and greed, and they don’t care how they get there.”

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Peat Marwick contends its county audits were properly performed and were never intended to ferret out risky financial maneuvers. Miller said a lawsuit would unfairly hurt Peat Marwick’s standing in the marketplace.

“We were not engaged to do any kind of special studies, special review, or investment portfolio review, and people keep forgetting that. We’re not investment portfolio advisers. That’s not within the scope of what we were doing,” said Miller, who added that the firm’s last audit covered the year ending June 30, 1993, 18 months before the bankruptcy.

However, a Peat Marwick executive in the spring of 1994 assured a local government agency about the safety of the county’s bankrupt investment pool. The executive, whose comments were captured by a tape recorder, told the agency an expert had been brought in and given the pool its stamp of approval.

KPMG Peat Marwick officials contend the executive’s comments were accurate at the time.

“KPMG was not asked, and did not second-guess, the county’s investment strategy,” Miller said earlier this year.

Peat Marwick has come under fire for failing to spot troubles in the county-run investment pool. County Auditor-Controller Steve E. Lewis said in January that he had asked the accounting firm in 1993 and in early 1994 to pay special attention to the county’s $7.4-billion investment portfolio.

Assisting the county in its legal groundwork is former Treasurer-Tax Collector Robert L. Citron, who pleaded guilty to misleading investors and misappropriating public funds. Citron has agreed to help the Orange County district attorney’s bankruptcy probe.

A suit against Nomura Securities would not be the first time the county has targeted the Japanese brokerage house that made loans to the county.

In a $1-billion suit filed Dec. 9, Orange County claimed Nomura unlawfully liquidated about $900 million in collateral that backed the county’s investment pool one day after the county filed for bankruptcy Dec. 6.

But in March, the county dropped its suit against Nomura. At the time, bankruptcy attorney Bruce Bennett said the county might reinstate its claim against Nomura once the court ruled on legal issues in the county’s suit against Merrill Lynch.

The speculation that Nomura might be sued again brings up the possibility that other brokerage firms that sold off collateral could be on the county’s legal hit list.

Last year, seven big Wall Street brokerage firms, including Nomura, unloaded nearly $9 billion of collateral the county had pledged under complex financial transactions called reverse repurchase agreements.

Other firms that sold the collateral and could be targets of county lawsuits include: Morgan Stanley, $1.6 billion of collateral sold; Kidder Peabody, $1 billion; Prudential Securities, $900 million; Smith Barney, $800 million; and PaineWebber, $650 million.

Several of the firms could not be reached for comment.

Representatives of Smith Barney, PaineWebber and Morgan Stanley said they were unaware of any threat of legal action.

The case against Nomura and the other Wall Street firms is likely to hinge on provisions of the Chapter 9 Bankruptcy Code, according to attorneys.

Chapter 9 contains an “automatic stay” that forbids creditors from enforcing their claims against a municipality operating under bankruptcy protection. The county contended in the suit against Nomura that the “automatic stay” provision should have put a freeze on the collateral and prevented the sales.

But Wall Street firms believe the collateral sales were within their rights.

Supervisor Marian Bergeson said it shouldn’t be a surprise that legal action is heating up.

“That’s been the plan all along,” Bergeson said. “Litigation is not only probable, it’s very likely for success, as far as providing the necessary funds in full.”

CALCULATING RESPONSE: Increase in suits puts accounting firms on defensive. A28

STATE ANALYSIS: Core of O.C. plan solid, but fiscal future is shaky, report says. A30