11 Cities, Agencies to Sue Orange County

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 on the grounds that the county knowingly operated on money stolen from its investors.

Dubbed the “killer bees” 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 former county Treasurer 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, which 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.”

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 last Dec. 6. He agreed to cooperate with state and federal investigators and remains free until the other cases are resolved.

This is the second lawsuit filed by the cities and government agencies. 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.