O.C. Asks Millions in 5 More Suits Over Bankruptcy

Broadening a campaign to recover the investment losses that drove it into bankruptcy, Orange County filed five new lawsuits Tuesday, demanding millions in damages from its former bond lawyers, a major Wall Street ratings firm, and even the federally chartered agency that sells student loans.

Attorneys representing the county filed the lawsuits in U. S. Bankruptcy Court here on the eve of the county’s emergence from the worst municipal bankruptcy in U. S. history.

“These lawsuits are an attempt to share the responsibility rather than shift it,” said J. Michael Hennigan, the county’s top litigation attorney, who has filed multibillion-dollar damage lawsuits against Merrill Lynch & Co., the brokerage firm that sold most of the exotic securities on which Orange County lost $1.64 billion, and KPMG Peat Marwick, the county’s former outside auditor. Both firms have denied any wrongdoing.

The lawsuits filed Tuesday named as defendants the investment banking firm Morgan Stanley; the Wall Street ratings agency Standard & Poor’s; the law firm of LeBoeuf, Lamb, Greene & MacRae, which gave the county legal advice on its borrowings; Rauscher Pierce Refsnes Inc., a Dallas brokerage that gave the county financial advice, and the Student Loan Marketing Assn., the quasi-governmental agency commonly referred to as Sallie Mae, which indirectly raises money for guaranteed student loans.

Officials for the firms being sued by the county have denied any wrongdoing. Calling the lawsuits without merit, the firms said they plan to defend them vigorously.

The suits focus on actions taken by each of the defendants in 1994, when former county Treasurer Robert L. Citron, who managed the county’s investment pool, borrowed more than $14 billion to make a series of wrong-way bets on the direction that interest rates would move.

Orange County argues in its suits that Citron’s heavy borrowings from brokerages and investment banks were in violation of the state Constitution, which forbids a county to borrow more money than it has the resources to repay.

The lawsuits accuse the latest group of defendants of failing to disclose or detect the risks that Citron was taking with public funds, and helping him increase his bets in a desperate attempt to recoup losses when interest rates began to rise.

Hennigan, the Los Angeles lawyer who heads the county’s litigation team, said attorneys carefully selected the five firms because they represented the major causes of action the county plans to pursue.

Roger Stanton, chairman of the county Board of Supervisors, which on Tuesday approved filing the suits, said they were intended to exact “some accountability from these folks who were hired in good faith by the taxpayers of Orange County to provide advice and counsel . . . and who fell down on the job.”

Following are summaries of the lawsuits, and responses from the defendants:

STANDARD & POOR’S

Orange County took what appears to be an unprecedented step in filing suit against Standard & Poor’s Corp., the Wall Street credit rating agency that signed off on hundreds of millions of dollars of Orange County bonds.

Major rating agencies scrutinize bond issues and then assign ratings designed to help investors judge the riskiness of such deals. Good ratings can significantly lower the cost of borrowing.

In its suit, Orange County claims that S&P; should have discovered the problems in the county’s investment pool. Instead, the rating agency made public assurances that the county’s investment strategy was sound, and that the county would be able to pay off bonds sold for the sole purpose of raising money to put in its investment pool, the suit charges.

If S&P; had disclosed the risks, the suit claims, the Board of Supervisors would have taken steps to halt the sale of more than $500 million in county bonds in the two years before the bankruptcy, cutting the county’s losses from $1.8 billion to $1.3 billion.

Michael Dorfsman, a spokesman for S&P;, said agency officials could not comment because they had not seen the suit. “But earlier this year, the SEC already determined that we were repeatedly misled by county officials at the time about the condition of the pool and the county’s finances,” Dorfsman said.

STUDENT LOAN MARKETING ASSN.

Orange County sued the Student Loan Marketing Assn., commonly known as Sallie Mae, for $58.7 million for selling volatile securities to Orange County for its troubled investment pool.

Although a publicly traded stock corporation, Sallie Mae operates under a federal charter. Created in 1972, Sallie Mae purchases student loans from banks and other financial institutions, and guarantees student loans sold in the secondary markets.

Corporations and municipal governments, such as Orange County, buy securities sold by Sallie Mae.

In four such securities issues, for which Orange County paid $913 million, the documents contained material misrepresentations and omissions from Sallie Mae, leading to losses of $46 million, the suit charges.

Gisela Vallandigham, assistant vice president of corporate communications with Sallie Mae, said agency officials could not comment specifically because they had not seen the suit. But, she said, “it’s inconceivable to us that any liability could be attached to the Sallie Mae debt obligations that ultimately ended up in the Orange County portfolio.”

LEBOEUF, LAMB, GREENE & MACRAE

The county accused LeBoeuf, Lamb, Greene & MacRae, its bond counsel on more than $975 million in borrowings, of “deceptive and incompetent services.” The suit further alleges that LeBoeuf “restructured the county’s internal finances in unusual ways to provide Citron with a justification” for increasing his risky and illegal borrowing strategy. The firm then offered opinions “attesting to the legality” of the transactions, according to the lawsuit.

Samuel M. Sugden, chairman of LeBoeuf, said the firm acted only as bond counsel, while other firms were responsible for disclosure issues.

“LeBoeuf had nothing to do with the creation of the investment strategy which led to the county’s losses, [and] was never asked to examine the safety of the investments in the Orange County investment pools,” Sugden said.

RAUSCHER PIERCE REFSNES INC.

The suit accuses Rauscher Pierce Refsnes Inc. of breach of contract and professional negligence. According to the suit, Rauscher served as “financial advisor” on several note offerings during the summer of 1994.

Rauscher officials participated in the drafting of the official statements for the county’s 1994 note offering. These officials, the suit states, should have known that Citron and former Assistant Treasurer Matthew Raabe were making potentially disastrous bets on the movement of interest rates.

Jennifer Driscoll, a Rauscher spokeswoman, responded that the company plans to defend itself vigorously.

“This [suit] is based on mistaken identity,” Driscoll said. “Rauscher Pierce Refsnes was never a financial advisor to Orange County as the suit alleges. As the official statements of the offerings clearly show, other firms had that role in each instance. . . . We had nothing to do with evaluating the makeup of the investment pool.”

MORGAN STANLEY

Morgan Stanley and Co. “facilitated” Citron’s speculative investment scheme by “engaging in illegal reverse repurchase transactions with the county” and selling the county exotic and risky securities, the lawsuit contends.

Those transactions violated the state’s Constitution restricting the borrowing and investment activities of municipalities, the suit said.

“This firm reaped enormous profits as a result of its failure to adhere to a regulatory framework that was specifically designed to protect taxpayers and residents from unauthorized acts of public officials,” county Chief Executive Officer Jan Mittermeier said in a statement.

Jeanmarie McFadden, a spokeswoman for Morgan Stanley, declined comment, saying the firm had not had a chance to review the lawsuit.

* UNDER FIRE: Suits have broad implications for bond rating firms. D1