Bankruptcy Litigator Could Reap Millions
Orange County’s litigation czar Thomas W. Hayes stands to make millions of dollars for his role in recovering losses from Wall Street firms and other financial and legal professionals the county holds responsible for its bankruptcy, according to court documents filed Monday.
Under terms of the previously secret arrangement, Hayes would receive 1.5% of all litigation proceeds over $200 million, but if the county recovers less than that amount, Hayes would go largely uncompensated. The county currently is seeking to recover more than the $1.64 billion it lost as a result of bad investments by its former treasurer.
In addition, the arrangement allows Hayes to steer an undisclosed amount of money for litigation-related consulting work to the firm he runs.
For Hayes, the arrangement--which still needs to be approved in U.S. Bankruptcy Court--has the potential of a large payoff depending on how much he recovers. Hayes would receive $1.5 million for every $100 million in litigation proceeds beyond the initial $200 million recovered.
“I didn’t want any guarantees. I wanted it based on incentives,” said Hayes, a former state treasurer, in an interview Monday. “I thought something like this was more equitable to the county taxpayers and me. It’s based on actual recoveries, not on any attempt to get a recovery. . . . I’m committing to this without any guarantees of a penny.”
But Hayes may make some money regardless of the outcome.
According to the arrangement, Hayes would be allowed to contract with Metropolitan West Securities Inc., a firm of which he is president, a director and a shareholder, to provide “analytical support, litigation consulting or expert witness testimony and asset management services.
Metropolitan West Securities would be paid from a $50-million litigation fund Hayes controls “and/or the litigation proceeds.” The proposed deal does not specify an amount that the firm would be paid. Under the arrangement, Hayes would be reimbursed for any “reasonable expenses” he incurs.
Bruce Bennett, the county’s bankruptcy attorney, said the arrangement is fair.
“He is a person who is regarded as a strong leader. This is going to be an enormously complicated effort and is going to take a lot of time,” Bennett said. He added that under bankruptcy law, Hayes would be able to keep up to 3% of every dollar recouped.
Supervisor William G. Steiner said he was supportive of the terms.
“It means [Hayes] could make millions of dollars, but you have to weigh that against the potential of recovering what could be billions of dollars,” he said.
The terms of the agreement are supported by the cities, school districts and other governmental agencies that lost money when former Treasurer-Tax Collector Robert L. Citron’s risky investments plunged in value and forced the county into bankruptcy on Dec. 6, 1994.
“I don’t think he’s being overpaid or underpaid for his effort,” said attorney Patrick Shea, who represents the pool participants. “I don’t think it will be an easy job. I’d like to see him get $2 billion if he can, and if he does, he’s worth every penny he gets.”
Under a complicated plan worked out with the county, most of the pool investors agreed to let the county pay back a portion of their losses with litigation proceeds. If the county litigation doesn’t recover any money, the pool investors are out of luck, and Hayes is too.
Shea said that if the county recovers $400 million from its litigation efforts, his clients will recover 90 to 95 cents on every dollar they invested with the county. Hayes would receive $3 million if he recovers $400 million.
However, Hayes’ compensation package did raise concerns among some city officials, especially those representing the 14 agencies that broke away from the majority of pool investors and decided to sue the county to recover their investment money.
“It’s an important job, and [Hayes] should be paid an adequate wage for taking on the responsibility,” said Buena Park City Manager Kevin O’Rourke. “But this certainly seems like an extraordinary amount of money.”
Shortly after the bankruptcy was declared, Hayes was brought in at the request of Gov. Pete Wilson to be the county’s financial advisor. He helped to liquidate and restructure the county’s troubled investment pool. Afterward, Hayes was tapped to lead the county’s legal battles to recover the money that was lost.
The county’s most significant lawsuit is against Merrill Lynch & Co., which sold most of the securities in the investment pool run by Citron. The county is suing Merrill Lynch for $2 billion.
“We have no comment at this time on Mr. Hayes’ proposed compensation,” said Merrill Lynch spokesman Timothy Gilles. “It doesn’t change the fact that the bankruptcy was unnecessary and Merrill Lynch is not to blame for the county’s problems.”
In addition to his litigation role, Hayes is being considered as a co-financial advisor for the county. Under a contract that will go before the Board of Supervisors in the next few weeks, Hayes’ brokerage firm would be paid $500,000 to work as co-financial advisor along with Salomon Bros. Inc. The contract would likely run through June 30--the projected date of the county’s emergence from bankruptcy.
Times correspondent Shelby Grad contributed to this report.
