O.C. Preparing to File 10 New Bankruptcy Suits

On the eve of Orange County’s emergence from bankruptcy next week, its attorneys plan to file a slew of lawsuits blaming lawyers, several Wall Street brokerages and other professional firms for the $1.64 billion in investment losses that caused the county’s financial downfall.

A salvo of 10 new lawsuits, which are to be filed in U.S. Bankruptcy Court here Tuesday, will signal the opening of the second phase of the county’s litigation campaign, which already includes multibillion-dollar damage suits against brokerage giant Merrill Lynch & Co. and KPMG Peat Marwick LLP, the county’s former outside auditor.

J. Michael Hennigan, who is heading the county’s litigation efforts, said Thursday that he could not disclose the identities of the next round of defendants until the suits are approved by the county’s Board of Supervisors at a closed hearing Tuesday morning.

But the county has previously stated in disclosure documents that likely targets include C.S. First Boston and other brokerages that sold the county risky derivative securities.

Other potential targets previously identified by the county include its former bond counsel, LeBoeuf Lamb Greene & MacRae, and the credit rating agencies that failed to warn about risks in the county’s investment pool.

Orange County filed the nation’s largest-ever municipal bankruptcy case in December 1994, when its highly leveraged $7.6-billion investment pool faced up to nearly $2 billion in losses.

The county expects to emerge from bankruptcy protection Wednesday, when the sale of $880 million in debt-refinancing bonds closes and the county pays off its vendors, bondholders and other debts.

The county is already pursuing a $2-billion damage suit against Merrill Lynch, which sold--wrongly, the county contends--billions of dollars’ worth of risky securities to former county Treasurer/Tax Collector Robert L. Citron. County lawyers have also filed a $3-billion suit against Peat Marwick, saying the Big Six accounting firm failed to warn county officials that the Citron-run investment pool was in danger of becoming insolvent and triggering a financial calamity.

Both firms have denied any wrongdoing, saying Citron made his own investment decisions and that county officials were trying to shift blame for the financial disaster.

Laurence M. Watson, the county’s top in-house lawyer, said supervisors will make the final decision on which suits to file.

“This has not been a secret,” Watson said. “Everybody knew a long time ago that there will be new defendants downstream.”

Meanwhile, county officials held a special Thursday afternoon meeting to receive a brief report on the bond sale and begin what will be a week of cautious celebration to mark the end of the bankruptcy.

In an atmosphere of relief and excitement, county supervisors, staffers and hired professionals gathered in the board meeting room that was the scene of historic budget-cutting votes and heated public hearings at which residents vented their anger over the bond crisis.

“This is June 6, 1996, exactly 18 months to the day that . . . [the county] went into bankruptcy,” declared Board Chairman Roger R. Stanton.

After the meeting, Stanton said, county officials planned to sign documents that would “remove the stigma of the bankruptcy.”

To officially commemorate the bankruptcy’s end, the county plans a noon ceremony at the Old County Courthouse on June 12, when the county’s trustee wires most of the proceeds of the bond sale to county creditors.

Chris Varelas, a Salomon Brothers financial advisor who helped engineer the recovery effort, said the county should pay off remaining bondholders, vendors, county workers and other creditors within 90 days.

Board members expressed gratitude to Varelas, the other financial and legal advisors as well as county Chief Executive Officer Jan Mittermeier and her staff for guiding the county recovery effort.

“We couldn’t have had better captains” charting the recovery course, Supervisor Marian Bergeson said.

Several supervisors, however, said the county must continue to make repayment of its debts a priority.

Along those lines, Supervisor Don Saltarelli proposed that the county set up a special fund for litigation proceeds and other cost savings that would go to pay off debts.

“It’s important that we show Wall Street and taxpayers that we have an aversion to debt and want to get out of it,” he said. “Our first objective is to get out of debt.”

At the end of the meeting, the audience broke into cheers, and some supervisors and county officials hugged one another and shook hands.