The High Cost of Going Bankrupt : Recovery: Digging O.C. out of fiscal disaster means paying experts hundreds of dollars an hour.

Orange County taxpayers lost $1.69 billion, and their government, one year ago today, sank into bankruptcy. Now, they are spending millions more to get out of it.

Accountants pore over fiscal ledgers at $325 an hour. Lawyers toil into the night--at $385 an hour. Financial advisors from one of the nation’s most prominent investment houses labor for the taxpayers at $150,000 a month. Clerks stand by the photocopy machines, running up bills that sometimes exceed $3,000.

Total so far: $29 million. And it’s nowhere near over.

The multi-pronged effort to lift Orange County out of the nation’s worst municipal bankruptcy has become a money-eating machine, gobbling up taxpayer funds at a rate of $2.4 million a month. That’s $115,000 a day.

County administrators are not alarmed.

They say Orange County’s bankruptcy was an epic disaster that will require equally dramatic expenditures of taxpayer cash to help it survive. While they have refused to pay several thousand dollars worth of claimed expenses--lavish dinners, big hotel bills--they have rarely questioned the sky-high hourly fees. They predict the total could climb much higher.

Indeed, participants in the county’s investment pool have agreed to create a separate $50 million fund to pay the costs of doing legal battle with Wall Street.

“Unfortunately, bankruptcy is expensive,” County Chief Executive Officer Jan Mittermeier said. “The fastest and best way to reduce these costs is to get out of bankruptcy, and that is what we are trying to do.”

The financial disaster spawned an array of battles that the county government must fight--and that taxpayers must pay for. Lawyers are drafting an immense plan to straighten out the government’s finances. They are readying a titanic legal assault on the Wall Street giant Merrill Lynch, demanding $2 billion. They are defending the county against a big lawsuit brought by local agencies demanding millions.

To handle all that, the county has hired some of the nation’s priciest and most prestigious legal and financial professionals. Among them are Salomon Bros., the New York investment banking firm, Arthur Andersen & Co., the nationally known accounting firm, and dozens of lawyers from 16 different law firms.

Talent costs money: Salomon and Andersen have billed taxpayers a combined $12.4 million so far. No less than 28 people retained by the county--mostly lawyers--charge more than $300 an hour. Herman Glatt, a Los Angeles bankruptcy attorney, boasts a rate of $435 an hour.

“Law firms with the experience and the reputation tend to charge more,” said Lee Bogdanoff, a lawyer in Glatt’s firm, Stutman, Treister & Glatt. His rate: $335 an hour.

The $30 million spent so far on the bankruptcy could employ about 600 county employees for a year--more than a third of the 1,600 the government shed from its work force.

And the clock is always running. Lawyers bill when they are in court, when they read, when they talk--and when they talk to each other. When bankruptcy lawyers J. Michael Hennigan, Bruce Bennett and James W. Mercer get together and talk, they each send the county a bill.

Some lawyers charge even when they are in the air. When New York lawyer Leslie Mazza flew to Orange County last December, she read bankruptcy documents on the plane. Cost to taxpayers: $2,000. And that was a bargain. Mazza billed the county $400 an hour, not her usual rate of $450.

Lawyers with the firm of Squire, Sanders & Dempsey routinely billed the county for flying to and from their offices in Phoenix and Cleveland, whether they read anything or not.

Some Orange County residents are alarmed at how much the county is spending. They say the bankruptcy has presented lawyers and accountants with such a grand opportunity to make money--to sell securities, argue in court, draft documents--that they won’t stop on their own.

“We don’t want to turn Orange County into a trough,” said William J. Popejoy, the former banking executive who was the county’s chief executive for a spell this year.

Lawyers and financial advisors helping Orange County say even though the numbers are high, taxpayers have no choice but to pay up. Bankruptcy is complicated business, they say, and the stakes are too high to do anything on the cheap.

A shoddy bankruptcy recover plan, they say, could ultimately cost taxpayers much more through higher borrowing costs and a limp economy. The plan they are assembling, they say, will allow Orange County to recover from a potentially crippling blow with relative ease.

“The county was confronted with a financial catastrophe,” said Bogdanoff, the lawyer with Stutman, Treister and Glatt. “The county needed good representation. There was no reason for the county to get behind the eight ball.”

Sky-high hourly rates are the reality of a competitive marketplace, they say.

“I am not going to apologize for charging $300 an hour,” said Paul Sachs, a partner with Arthur Andersen & Co. “I’ve added a lot of value to the county.”

In a single month this year, Sachs billed 236 hours--and charged the county $76,700. That’s $325 an hour.

If all goes according to plan, Orange County will rise from insolvency in June--a mere 19 months after it plunged into it. Compared to companies of comparable size, that would be a very rapid recovery, and would save money, bankruptcy lawyers say.

“The true economy of this case is that it will be over in a short amount of time,” Bennett said.

Then there is the county’s ambitious lawsuit against Merrill Lynch & Co. The county is suing for $2 billion, claiming the firm led the county astray with bad investments. Merrill Lynch denies any wrongdoing.

The lawsuit is a multimillion-dollar gamble. The county has no assurance it will recoup as much a dime from Merrill Lynch, but it will cost millions to find out. So far, taxpayers have been billed $5 million for the effort against Merrill. And the suit has many months to go.

County supervisors say the expense is worth the risk.

“There is so much in potential benefits for the county that we really don’t have a choice,” Supervisor William G. Steiner said.

The lawyers handling the Merrill suit say taxpayers are getting a bargain. Lawyers at Hennigan, Mercer & Bennett have employed a sophisticated computer to scan more than a million documents--which they can then recall at a mere keystroke. Such high-tech prowess, the lawyers say, enable them to keep their costs down.

By comparison, they point to Merrill Lynch, which they estimate has spent as much as $40 million preparing for the court battle.

“The taxpayers are getting an astonishingly good deal,” lawyer Hennigan said.

Not everyone thinks so. Several people wonder aloud why the county government has not sought deeper discounts from its professionals. The government is, after all, bankrupt. And it is, after all, spending public money.

“Given the amount of work and the certainty of payment, it would not have been unreasonable to ask for a discount,” said William R. Mitchell, a lawyer and chairman of Orange County Common Cause.

Popejoy, the former county CEO, echoed Mitchell’s complaint. Southern California is full of lawyers who could do the work.

“We’re not talking about brain surgery here,” Popejoy said.

The lawyers handling the case vehemently disagree. Bennett, for one, says bargain rates are a “false economy”--that lawyers will always work harder on the cases that pay them the most.

“All of the people here can get more than enough work at their regular rates,” Bennett said. “And that is the work they will do. That’s the reality.”

In fact, several of the firms working the bankruptcy have offered the county slightly lower rates. Arthur Andersen lops 10% off its bill, Sachs said. Willkie Farr & Gallagher, whose lawyers helped prepare bond issues, lowered their hourly rates from $450 an hour to $400.

Chris Varelas, a Salomon Bros. vice president, said his firm took many small steps that saved taxpayers millions. Case in point: When the firm sold off the county’s investment portfolio, Salomon’s brokers took the unusual step of selling securities back to their original issuers. That saved taxpayers as much as $30 million, Varelas said.

“We do not want to be perceived as trying to take advantage of the situation,” Varelas said.

Still, Salomon stands to gain handsomely from its work on the bankruptcy. As the lead financial advisor and securities broker, Salomon gets a flat fee of $150,000 of a month--it got $500,000 up front--and a management fee for overseeing the county investment fund. The company also collected commissions for liquidating part of the county’s investment fund immediately after the bankruptcy.

The $150,000 fee is something of a bargain, Varelas said. He has spent the past year living out of a suitcase, dedicating himself almost entirely to the bankruptcy. For months, the suitcase was at the Westin South Coast Plaza hotel in Costa Mesa.

“I have clients that pay $150,000 that I don’t even see every month,” Varelas said.

To date, Salomon has collected $6.6 million--more than any other firm. And its biggest single payoff is yet to come. Salomon will act as the financial advisor on a bond issue the county will undertake next year as part of the bankruptcy recovery. The expected fee: At least $2 million.

For all the money the county administrators have agreed to pay, they have balked at several bills. Dennis Bunker, Orange County claims manager, scans every single charge that comes in.

Among those he’s rejected or reduced:

* A meeting last December to which the Los Angeles firm of Hawkins, Delafield & Wood brought eight lawyers--and billed the county $6,931.75.

* A January bill for $7,162 submitted by Hawkins, Delafield & Wood--even though the firm was informed the month before that its services were no longer needed.

* An Arthur Andersen & Co. bill for $4,029.12 for parking expenses. “No receipts, no payment,” Bunker said.

* A 5% surcharge the law firm Squire, Sanders & Dempsey tacked on its legal bills--about $6,000.

* All expenses submitted by Willkie Farr & Gallagher, the county’s bond counsel--about $147,000. Among the charges were breakfasts that came out to $18 per person, and dinners at $60.

“The meal charges are ridiculous,” Bunker wrote Willkie Farr lawyer Richard Posen. “The county is in bankruptcy.”

Posen didn’t return a phone message left at his office in New York.

Most of the bills questioned by county administrators have been for expenses. Hourly bills are harder to question, they say.

“Whenever attorneys decide whether to spend an hour on a given issue or not, it’s a judgment call,” Mittermeier said. “You hire these people as your experts. Theoretically, they are the ones who decide.”

Most of the time, the professionals are billing for things that only they can do--writing, arguing, preparing for a case.

But not always. Earlier this year, Arthur Andersen charged the county $85 an hour to have one of its staffers perform routine clerical tasks. According to county records, Diedrey M. Waltjen spent 2.6 hours “photocopying supporting documentation” and delivering documents to the printers.

Total cost to taxpayers: $221, not including the copies.

“These are heat-of-the-battle decisions,” said Sachs, of Arthur Andersen.

Sometimes the minutes on the billing sheets don’t quite add up.

Three lawyers hired by the county--Bennett, Hennigan and Mercer--got together for a meeting last May 25. Bennett billed for 1.1 hours. Hennigan billed for 1.5 hours. Mercer billed for .3 hours.

So, how long did the meeting last?

Bennett said he doesn’t recall exactly, but he said he sometimes “lumps” charges together, and didn’t bill for other time spent on the county’s case.

“We shouldn’t do that, but sometimes we do,” he said.

Bunker, the county risk claims manager, said it’s problems like that that give him headaches.

“I don’t like to pay out any of it,” he said.

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The $1,134 Meeting

Lawyers helping Orange County emerge from bankruptcy even charge for talking to each other. Here, for instance, is the billing for a May 25 meeting. The lawyers, all members of the same firm, say they are not sure why the times billed differ.

BRUCE BENNETT

“Conference with Hennigan and Mercer re status of various issues.”

1.1 hours at $385/hour: $423.50

****

J. MICHAEL HENNIGAN

“Review status of various issues and problems with Messrs. Bennett and Mercer.”

1.5 hours at $395/hour: $592.50

****

JAMES W. MERCER

“Conference with Messrs. Hennigan and Bennett.”

.3 hours at $395/hour: $118

Total billing: $1,134

Source: County records

Researched by DEXTER FILKINS / Los Angeles Times

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Fees Aplenty

Through Nov. 30, Orange County had been billed $29 million for legal and financial services, expenses and commissions related to the bankruptcy. Some charges have been rejected or disputed by the county. Here’s the tab:

Firm: Salomon Bros. Inc.

Role: Liquidated county portfolio, managed investment pool, provided support for bankruptcy case

Fee: $6,640,279

****

Firm: Arthur Andersen & Co.

Role: Provided accounting and financial services, reviewed county portfolio, provided support for lawyers working on behalf of county

Fee: $5,733,242

****

Firm: Howrey & Simon

Role: Handled original litigation against Merrill Lynch. Replaced when lawyers J. Michael Hennigan and James Mercer left to form their own firm

Fee: $3,506,378

****

Firm: Hennigan, Mercer & Bennett

Role: Handled bankruptcy case and county’s $2-billion lawsuit against Merrill Lynch

Fee: $2,671,078

****

Firm: Stutman, Treister & Glatt

Role: Handled bankruptcy case

Fee: $2,619,647

****

Firm: Murphy, Weir & Butler

Role: Represented creditors owed money by county

Fee: $2,544,187

****

Firm: Willkie Farr & Gallagher

Role: Reviewed county finances, and helped draft bankruptcy recovery plan

Fee: $1,891,839

****

Firm: Chanin/Sutro Joint Venture

Role: Financial advisor to the creditors owed money by county

Fee: $1,229,081

****

Firm: Bryan Cave

Role: Represented county supervisors in investigation by U.S. Securities & Exchange Commission, and in lawsuits brought by creditors

Fee: $596,739

****

Firm: Squire, Sanders & Dempsey

Role: Reviewed county finances. Replaced in January. Also served as defense counsel for former Finance Director Eileen Walsh

Fee: $290,625

****

Firm: Hawkins, Delafield & Wood

Role: Reviewed county finances

Fee: $272,855

****

Firm: CPT Group Inc.

Role: Performed mailings

Fee: $228,773

****

Firm: Marschack and Goe

Role: Represented contractors owed money by county

Fee: $227,872

****

Firm: Greenberg, Glusker, Fields, Claman & Machtinger

Role: Represented Auditor-Controller Steve E. Lewis

Fee: $165,707

****

Firm: Bird, Marella, Boxer et al

Role: Represented former Assistant Treasurer Matthew Raabe

Fee: $158,204

****

Firm: Barton, Klugman and Oetting

Role: Represented various county employees who also had to make appearances before SEC

Fee: $64,151

****

Firm: David W. Wiechert

Role: Represented former County Treasurer Robert L. Citron

Fee: $55,403

****

Firm: Michaelson and Levine

Role: Represented former Finance Director Eileen Walsh

Fee: $43,374

****

Firm: Donahue Mesereau and Wells

Role: Represented former Chief Administrative Officer Ernie Schneider

Fee: $36,911

****

Firm: Thomas W. Hayes

Role: County financial advisor immediately after bankruptcy

Fee: $23,255

****

Firm: Wehner and Perlman

Role: Represented former county Budget Director Ron Rubino

Fee: $6,538

Source: County Risk Management

Researched by DEXTER FILKINS / Los Angeles Times

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Only the Best

Orange County has hired some of America’s priciest legal and financial talent to help lift it out of bankruptcy. The typical county employee laid off after the bankruptcy cost about $27.50 an hour, including insurance and retirement contributions. A partial list of legal and financial advisors who have worked or currently are working for the county at more than $300 per hour:

*--*

Lawyer Firm Hourly Rate Herman Glatt Stutman, Treister & Glatt $435 Robert A. Greenfield Stutman, Treister & Glatt 405 Dale Collinson Willkie Farr & Gallagher 400 Dennis Deveney Willkie Farr & Gallagher 400 Peter Kenny Willkie Farr & Gallagher 400 Leslie Mazza Willkie Farr & Gallagher 400 Jack Nusbaum Willkie Farr & Gallagher 400 Richard Posen Willkie Farr & Gallagher 400 Thomas Rothman Willkie Farr & Gallagher 400 Barry Seidel Willkie Farr & Gallagher 400 J. Michael Hennigan Hennigan Mercer & Bennett 395 Alan Pedlar Stutman, Treister & Glatt 395 Charles Axelrod Stutman, Treister & Glatt 395 James W. Mercer Hennigan, Mercer & Bennett 395 Isaac M. Pachulski Stutman, Treister & Glatt 395 Kenneth Klee Stutman, Treister & Glatt 395 Ronald L. Fein Stutman, Treister & Glatt 395 Bruce Bennett Hennigan, Mercer & Bennett 385 Jeffrey C. Krause Stutman, Treister & Glatt 375 Stephan M. Ray Stutman, Treister & Glatt 375 Mark S. Wallace Stutman, Treister & Glatt 365 Michael H. Goldstein Stutman, Treister & Glatt 330 Lee Bogdanoff Stutman, Treister & Glatt 335 G. Christopher Meyer Squire, Sanders & Dempsey 305 Lauren Smith Hennigan, Mercer & Bennett 300 Accountant Paul Sachs Arthur Andersen & Co. 325 Chris H. Paskach Arthur Andersen & Co. 325 Financial Service Salomon Bros. $150,000/month

*--*

Source: County Risk Management

Researched by DEXTER FILKINS / Los Angeles Times