Group’s Status Worries Bankruptcy Judge

The judge presiding over Orange County’s bankruptcy case expressed concern Wednesday that one group of cities and public agencies that lost money in the county’s investment pool would not share in the millions the county hopes to recoup from Wall Street and accounting firms blamed for the pool’s losses.

Judge John E. Ryan said that under the county’s bankruptcy plan, the group, known as the Option Bs, was excluded from receiving any proceeds from the county’s multibillion-dollar lawsuits.

The group got its name for having chosen Option B under a court-approved settlement. Pool investors selecting that option got 77% of their pre-bankruptcy deposits, but were left with the right to sue for their unpaid balances.

The vast majority of pool investors chose Option A, which gave them an identical 77% payout or more, but assigned their rights to sue to the county.

The county has filed damage suits against Merrill Lynch & Co., which sold the county most of the exotic investments that lost $1.64 billion in value in 1994, and against KPMG Peat Marwick, the outside auditing firm that failed to detect problems with the county’s investments.

Both firms have denied any wrongdoing.

Under terms of the county’s bankruptcy settlement, the Option A’s will recover the remainder of their deposits only if the county realizes a windfall from its lawsuits.

The Options Bs claim they are still due more than $50 million. Larry Engel, an attorney representing the Option Bs, said that his clients would only recover 52 cents on the dollar under the county’s current plan for repaying its debts.

The judge said it is normal procedure for any money from litigation proceeds to be distributed fairly to pool investors.

“That’s not happening here,” he told county bankruptcy lawyers. “I’m putting you on notice that I have a problem with how this [group of investors] is being treated.”

County bankruptcy attorney Bruce Bennett told the judge that Option B participants had insisted that the county could not sue on their behalf to recover losses. Therefore, the Option Bs were not entitled to these proceeds.

Ryan’s remarks came at the end of a daylong hearing into what is termed the county disclosure statement.

Ryan eventually approved the disclosure statement after instructing Bennett to make some minor technical changes.

Meanwhile, the Securities and Exchange Commission has urged a federal court to back its proposed settlements with the county officials widely blamed for the financial collapse.

In a court filing this week, the SEC said it believed that the proposed judgments “fulfill the commission’s goals and [serves] the public interest by deterring future violations of the securities laws and, thus, protecting the marketplace.”

The SEC filed the papers after U.S. District Judge Gary L. Taylor in February called a March 28 hearing to consider the “appropriateness” of the SEC’s settlements with former county treasurer Robert L. Citron, his top deputy, Matthew Raabe, and members of the Board of Supervisors who had the responsibility to oversee Citron’s operations.