‘Killer Bee’ Pool Investors Seek to Sting O.C. in Court

Eleven California cities and government agencies that retained their rights to sue Orange County for the unpaid balances of their investment pool accounts are going to court today, seeking $44 million of their own money and triple damages because the county knowingly operated on money stolen from its investors.

Dubbed the “Killer Bees” by county officials for having chosen Option B under a court-approved settlement that returned only 77% of pool investors’ pre-bankruptcy deposits, the group accuses the county of skimming investor funds to perpetuate “big government as usual” in Orange County and avoid living within the reduced means imposed by a statewide recession.

Ironically, the Bs support their claims by using the county’s own assertions in its $2-billion damage suit against Merrill Lynch & Co., which the county blames for the massive investment pool losses that pushed the county into bankruptcy last December.

The vast majority of the pool’s nearly 200 governmental investors chose Option A last May and received 77% of their investments, with a series of IOUs for their balances. In electing to settle for county IOUs, however, the As had to surrender their rights to sue either the county or the Wall Street firms being blamed for the financial mess.

In identical, 78-page complaints being filed in U.S. Bankruptcy Court here, the 11 entities seize on one critical admission in the county’s lawsuit against Merrill Lynch & Co.--that the investment pool run by then-County Treasurer-Tax Collector Robert L. Citron functioned as a “trust” and the county is therefore liable for the funds entrusted to it.

By recklessly investing billions of dollars of investor funds, and then misappropriating some of the proceeds for county operations, Citron violated his fiduciary duty to the investors. And because Citron acted in his official capacity as county treasurer, the county itself is liable for his acts, the suits allege.

“The county is confident the Option B pool participants’ litigation and financial strategies are poorly thought out and, in the end, will fail,” said John Amsden, one of the county’s bankruptcy lawyers.

Amsden would not elaborate, saying, “I’m hesitant to go into particular reasons, but I can say that I’d rather be on our side of the fence.”

But even if the Bs prevail, Amsden said, “at most, they’d be a creditor in the county’s bankruptcy just like anyone else.”

G. Larry Engel, a lawyer with Brobeck, Phleger & Harrison, who represents the Bs, said, “the legal question is whether a county gets to keep as much money as its treasurer can steal. Even if you’re a county and you’re politically powerful, the law simply cannot allow you to go out and steal someone else’s money. That’s what Orange County did.”

Orange County officials acknowledged earlier this year that more than $79 million belonging to other pool participants had been misappropriated and credited to county accounts.

Citron pleaded guilty in April to six felony counts, including securities fraud and misappropriation of funds in connection with the $1.69 billion in trading losses that prompted the county to file for bankruptcy under Chapter 9 last Dec. 6. He agreed to cooperate with state and federal investigators and remains free until the other cases are resolved.

The lawsuits lay out what Engel terms “the big fraud” by Orange County, a scheme engineered by county officials, and tacitly approved by the Board of Supervisors, to avoid coming to grips with major budget shortfalls and the cutbacks they would have entailed by skimming and embezzling the interest earnings of others, and gambling ever more heavily in risky securities.

“The county needed ever greater hidden amounts of trust funds from which it could steal,” according to the complaint, “to cover the county’s concealed and increasing budget deficits.”

The county projected as “revenues” in its budget “funds it intended to and did embezzle,” the lawsuit states, and later “wrongfully dumped its losing investments in the [pool] to cover the county’s own investment losses.”

The Bs seek to hold the county responsible for dumping the so-called “toxic securities” back into the pool, effectively spreading the county’s losses among the other pool participants.

“Orange County for its own account invested approximately $250 million . . . in an extraordinarily risky, unsuccessful gamble,” the lawsuit states. “When the county perceived that the gamble was fatal to its hopes . . . it sold (i.e. dumped) the ‘toxic’ securities into the [pool] . . . causing a loss in excess of $400 million.”

Only two Orange County agencies that chose Option B are currently part of the lawsuit--the Santiago County Water District and the City of Buena Park.

“We were presented with the options last spring and everyone said Option A was the best place to go,” said Kevin O’Rourke, city manager of Buena Park. But that presumed “we had to . . . trust the county to deliver. I think that based on their performance since then, one should not trust the county with their financial future.”

Mike Martello, city attorney for Mountain View, one of the 11 agencies, said he still finds it incredible that county officials didn’t question more rigorously where Citron was going to come up with almost a third of its general fund budget in interest income--$160 million--in 1994.

He said the lawsuit will show that the county’s “Board of Supervisors and its chief executive absolutely had to know what Citron was doing.”

“Orange County clearly misappropriated money that wasn’t theirs and used it to cover a third of their budget,” Martello said, adding that “they planned to keep on doing it until the balloon burst.”

Martello represented the non-Orange County cities on the pool participants committee during the lengthy negotiations to reach an agreement to disburse what remained in the investment pool.

Martello said he didn’t think it would derail the county’s current bankruptcy plan, even if the Bs prevail.

“We’re probably too small to do that, but the upside of being small is that the county can really make us whole or very near whole very easily,” he said.

Martello said he believes the county “is hiding a lot of money” in the form of unspent reserve balances in different funds. He said “everyone has focused on the general fund budget [now $275 million], but the county has between $2 billion and $3 billion in other funds that it will spend this year.”

“Orange County still has to downsize tremendously,” Martello said. “I hope they figure out a way to settle with us.”

This is the second lawsuit filed by the group. Last month they sued Merrill Lynch & Co., alleging as the county has that the brokerage firm fraudulently misled them, causing them to lose $50 million. Merrill Lynch denies it has done anything wrong.

The lawsuits against the county were prepared to be filed individually for procedural reasons, but attorney David J. Brown, who also represents the group, said he expected them to be consolidated into a single case.

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Who Are the ‘Killer Bees’?

Earlier this year, the more than 200 cities, school districts and other government agencies with money frozen in the county’s collapsed investment pool were given the choice of accepting a series of county IOUs for roughly 23% of their pool deposits or reserving their rights to sue. The vast majority of them selected Option A, which provided them roughly 77% of their money in cash and their balances at a unspecified later date. But under Option A, agencies gave up their right to sue for the return of additional pool money. About a dozen agencies chose Option B, which also gave them about 77% of their money in cash but allowed them to sue for the remainder. These agencies became known as the “Killer Bees.”

Here is a list of the Option B agencies involved in the lawsuit against the county and the amount each one had invested in the pool when bankruptcy was declared Dec. 6:

* Atascadero -- $5 million

* Buena Park -- $18 million

* Buena Park Redevelopment Agency -- $10.9 million

* Claremont -- $5.3 million

* Milpitas -- $5 million

* Montebello -- $33.4 million

* Montebello Redevelopment Agency -- $13.6 million

* Mountain View -- $39.7 million

* Santa Barbara -- $25.7 million

* Santa Barbara Redevelopment Agency -- $11.7 million

* Santiago County Water District -- $2.1 million

Source: Times clips, County of Orange, interviews