O.C. Suits Out of Bankruptcy Court

A federal judge decided Thursday to remove from U.S. Bankruptcy Court most of Orange County’s multibillion-dollar lawsuits accusing Wall Street and accounting firms of contributing to the county’s financial collapse.

U.S. District Judge Gary L. Taylor took control of five of the eight cases in which the county claims that brokerages, accountants and others were to blame for the collapse of its $21-billion investment pool and subsequent bankruptcy.

The issue had been hotly contested over the last two years, and Taylor twice had denied requests by Merrill Lynch & Co., the county’s primary securities advisor and one of the key defendants, to move the case out of Bankruptcy Court.

The defendants asserted that such litigation belonged in federal court, but the county contended that Bankruptcy Judge John E. Ryan was more familiar with the financial issues in the case and could handle the matter more efficiently.

But county lawyers now say they welcome the change.

“It was always clear that these cases were going to be moved to federal court,” said J. Michael Hennigan, one of the county’s attorneys. “It was just a question of timing.”

Merrill Lynch issued a terse statement: “We are pleased with the decision and we remain confident in our legal position.”

Hennigan said he and other lawyers involved in the three cases remaining in Bankruptcy Court are working on an agreement to move those cases as well to Taylor’s court.

In early 1995, Merrill Lynch sought to move the litigation to federal court, but Taylor denied the request, saying it was premature. The judge also rebuffed the brokerage’s second effort last spring.

But since then, circumstances have changed dramatically. The county won approval of a reorganization plan that let it emerge from the biggest municipal bankruptcy in U.S. history. While Bankruptcy Judge Ryan retained control of the lawsuits and oversight of the reorganization plan, the administration of the bankruptcy was over.

The third effort to remove the case, which proved successful, was initiated last summer by accounting firm KPMG Peat Marwick. Hennigan, who had fought hard to keep the lawsuits before Ryan in the past, also opposed Peat Marwick’s motion.

Hennigan said his opposition was “largely out of deference and respect for Judge Ryan.” But his partner, Bruce Bennett, said earlier this week that the defense effort to move the cases was designed simply to delay the litigation and deny the county a timely trial.

He also pointed out that Merrill Lynch may seek a change of venue to get the case out of Orange County, which he says would further delay a trial. Merrill, which has raised that issue in court, wouldn’t comment.

Hennigan viewed the situation differently after Taylor’s ruling Thursday. “We are ecstatic about this,” he said. “We hope the case starts moving ahead at a much more rapid pace.”

He explained that the lawsuits had to stay in Bankruptcy Court in the early stages because a number of legal issues weren’t clear, more pretrial information had to be gathered, and Ryan was familiar with the financial structure of the investment pool.

But now, he said, the federal court is better suited to handle a massive trial.

The county’s investment pool crashed in December 1994 as rising interest rates undermined the more complicated and risky securities in the pool. Losses totaled $1.64 billion, forcing the county into bankruptcy.

Merrill sold the county $14 billion in securities, many of them among the riskiest investments in the county’s portfolio. The brokerage also sold securities issued by the county, underwriting a total of $875 million in bonds that the county sold in 1993 and 1994. Altogether, it earned fees totaling $62.4 million from the county for those two years.

In its lawsuit against Merrill, the county alleges that the firm sold it unsuitable securities and concocted an elaborate investment scheme that broke state law and led to the investment pool’s collapse.

Merrill denies any wrongdoing, arguing that it had repeatedly warned that the county was pursuing a highly risky strategy. The brokerage contends that any scheme would have been concocted by then-Treasurer-Tax Collector Robert L. Citron, who has pleaded guilty to fraud.