O.C. Reaches Tentative Pact With Dissident Investors

Orange County has reached a tentative agreement with a dissident band of investment pool participants who had threatened to scuttle the county’s carefully crafted bankruptcy recovery plan, attorneys and officials said Monday, even as they continued to haggle over the wording of the deal.

The agreement affects 14 of the 198 cities and agencies that had deposited money with the county when its investment pool suffered $1.64 billion in trading losses, triggering the bankruptcy in December 1994.

“There’s a settlement in principle,” said James L. Markman, city attorney for Buena Park, one of the dissident entities.

The Buena Park City Council unanimously agreed Monday night to accept the settlement, becoming the first entity to do so.

Supervisor William G. Steiner agreed Monday that the two sides “have an agreement in concept. There will be a special board meeting called on Thursday.”

“There have been no vibes that [the deal] was off,” Steiner said, “so I guess we can breathe a sigh of relief.”

Added county bankruptcy attorney Bruce Bennett: “I can say that there’s been a basic agreement and that there is a document that is circulating. We have every indication that this is something that the [group] will accept.”

If accepted by the city councils and boards of the dissident agencies, the settlement would remove a significant obstacle to the county’s financial recovery and its plan to emerge from bankruptcy by June 30.

The urgency to reach a settlement with the group has been building since late March, when U.S. Bankruptcy Judge John E. Ryan told Bennett he had “a problem with how this [group] is being treated.”

Fearing that a protracted legal fight might endanger the state’s ability to borrow money and cause Orange County to default on $800 million in debt coming due in June, Gov. Pete Wilson’s office recently told both sides that a trustee would be appointed if the matter is not resolved.

Known as the “Killer Bs” because they chose Option B when the cash remaining in the pool was disbursed last year, the agencies received 77% of their investments back but insisted on retaining their rights to sue financial firms involved in the collapse of the county’s investment fund.

The vast majority of the pool investors chose Option A. They too received back 77% of the money they invested, but gave up their rights to sue to the county.

In October, the Bs sued the county, claiming members had been knowingly defrauded by a county scheme to divert funds from the investment pool to cover the county’s budget deficit.

The group also sued Merrill Lynch & Co., the Wall Street brokerage firm that sold most of the risky securities the county had purchased.

The tentative agreement calls for the Bs to drop their lawsuit against the county in return for about $7.5 million in cash, $8 million in IOUs and $9 million in litigation proceeds should the county’s lawsuits against Merrill Lynch and others succeed.

The total payout to the Bs would be nearly identical to the sum accepted by the other 182 pool participants--about 89% of their original investments in cash and IOUs. But more important, the deal would allow the dissenters to retain all of their litigation rights.

“We’re essentially in the same position as the A’s, dollar wise,” said Yorba Linda Mayor John M. Gullixson. “The big difference is the A’s have signed their [legal] rights over. We continue to maintain control of our own destiny, legally.”

Gullixson said the Bs are confident they can recover more than enough from financial firms to recoup all of their investment losses, plus lost interest and attorney fees.

Said Steiner, “As long as the A’s don’t feel like the Bs are getting a better deal--and the A’s were at the [negotiating] table--it looks like we’re going to have a deal.”

But even the perception that the Bs may wind up better off than A’s could be a source of friction.

Irvine City Manager Paul O. Brady Jr. said Monday that he and other Option A investors would have grave concerns if it turns out the Bs got a better deal.

“Those of us who selected Option A would be upset if the Bs come out better than us and get to retain the litigation rights that we gave up,” Brady said.

“If the Bs get a package that is a little less than what we got, I have no problem with that.”

Westminster Mayor Charles S. Smith, former chairman of the Orange County Transportation Authority, also criticized the county’s tentative deal.

“I think it’s bad faith negotiating on the part of the county,” Smith said. Option A cities “gave up the right to sue to get our 80 cents on the dollar. We did it in good faith. We’ve kept our side of the agreement . . . but the county hasn’t kept its side.”

But Stan Oftelie, head of the Orange County Transportation Authority, the largest investor in the county’s failed pool, said he thought most of the Option A agencies would not object to the terms.

“It seems to me it’s an A-minus deal, but I think it’s salable,” Oftelie said. “The A’s are in about the same place, but the Bs will have spent how many millions to get there?”

Markman said the tentative deal required 15 hours of conference calls and six different drafts of the agreement by the Option B litigation steering committee.

“I hope we’re done,” he said.

The Option B entities are: Atascadero, Buena Park, Claremont, Milpitas, Montebello, Mountain View, Santa Barbara and Yorba Linda; the Buena Park, Montebello, Santa Barbara and Yorba Linda redevelopment agencies; and the Santiago and Yorba Linda water districts.

All the cities, agencies and the county Board of Supervisors must vote to approve the settlement before it becomes official.

Times correspondent Shelby Grad contributed to this report.