Details Scarce on $50-Million O.C. Legal Fund

It’s the final piece of Orange County’s bankruptcy puzzle, $50 million in taxpayer money that was set aside to pay for lawsuits against the Wall Street firms the county blames for its December 1994 financial collapse.

If the multibillion-dollar damage suits are successful, scores of cities, school districts and other government agencies could recoup the remainder of the losses they suffered 26 months ago, when the county-run investment pool lost $1.64 billion on risky Wall Street securities.

Despite the high stakes, however, the litigation effort is being waged with little or no scrutiny from the public whose money is being spent.

The more than 200 plaintiffs in the lawsuits have given one man, former California Treasurer Thomas W. Hayes, total control over how the $50 million is spent, and how the cases are handled.

And Hayes, who even has the power to settle the cases without approval from anyone, isn’t answering questions about spending.

Citing public records laws, The Times sought information from Hayes about the money paid thus far to the law firms handling the litigation, and whether any cost-control guidelines, like those adopted by the county, were being followed.

Similar requests were sent to county officials from time to time during the 18-month bankruptcy, and county officials routinely produced copies of the legal bills they had received, including those related to the litigation.

Hayes elected not to respond to the latest request himself, and instead forwarded it to Bruce Bennett, the county’s lead bankruptcy attorney whose law firm continues to submit the lion’s share of the legal bills.

Bennett said his firm’s fees had totaled $3.5 million from June through November last year, but declined to itemize the charges or explain Hayes’ billing policy. He said that a detailed rendering of the legal bills would reveal the county’s litigation strategy to its adversaries, and thus jeopardize the cases.

Anyway, Bennett added, “we do not agree that the information you have requested falls within the California Public Records Act.”

This tight-lipped approach troubles some attorneys, community activists and legal experts, who said a lack of public oversight makes it difficult if not impossible to detect overly generous payments to attorneys, or flaws in the legal strategy.

“We are talking about public financing here, not national security,” said Ron Rus, an Irvine bankruptcy attorney. “The whole problem with litigation like this is conducting a case while still complying with a sense of the public’s right to know.”

“Unless you have ongoing scrutiny, you can see that everyone in the process accommodates each other, and the taxpayers get sold down the river,” added Bruce Whitaker, a leader of the Committees of Correspondence, a citizen watchdog group that came together in the wake of the county’s bankruptcy. “People need to be asking questions.”

Whitaker, Rus and others agree that Hayes’ legal strategy should not be aired publicly. But they question whether all litigation activities should remain secret.

“I’m very skeptical of any lawyer [paid with public funds] saying his bills are not covered by the public records act,” said James L. Markman, the city attorney for Buena Park and Brea. “If I were a city’s attorney, and I didn’t want the public to see my bills, I’d be looking for new clients.”

Markman, however, is one of very few government officials to express concerns about arrangement.

Many elected leaders hail Hayes’ powerful role as the only realistic way to handle such complex lawsuits involving so many public agencies.

Hayes, a respected public finance expert who helped manage the county’s fiscal affairs in the weeks following the 1994 bankruptcy filing, was chosen to administer the litigation fund because local cities didn’t trust county government to handle the cases.

There were also fears that having so many agencies involved could turn the litigation into a political football.

The solution was to appoint Hayes as the litigation czar.

“There was no effort to shield [the litigation process] from the public,” Bennett said. “But there needed to be a decision-making process that is efficient and coherent. Time will tell if we are successful.”

After battling over the bankruptcy for nearly two years, several city officials said they were eager to hand off responsibility for the lawsuits to a third party and get back to the business of local government.

“We basically signed-off on this and hope they are successful,” said Claremont Mayor Algird Leiga, a critic of county government’s handling of the bankruptcy. “I don’t see our role as being more than that.”

But some critics said they are alarmed that officials aren’t doing more to oversee their litigation dollars.

“There seems to be an out-of-sight, out-of-mind mentality here,” Whitaker said. “They seem to feel the bankruptcy is now water under the bridge.”

Whitaker said city councils and school boards should demand detailed breakdowns of legal costs to make sure attorneys are not being overpaid.

“Tom Hayes has a lot of integrity. But with this amount of money, there has to be public accountability,” he added.

The $50-million litigation fund was created as part of the county’s bankruptcy recovery plan. The money came from the $800 million the county borrowed on Wall Street last June with the sale of its bankruptcy recovery bonds.

If the $50 million is exhausted, the plan allows for some proceeds from case settlements and judgments to replenish the fund. Any money not used for litigation would go back to the government agencies.

The county and its pool investors are suing Merrill Lynch & Co. and six other financial services firms, including Morgan Stanley, Standard & Poor’s bond rating agency, the Big Six accounting firm of KPMG Peat Marwick, the county’s auditor, and the Student Loan Marketing Assn., which issued some of the most risky securities that found their way into the county’s portfolio.

Merrill Lynch is considered the prime target. County attorneys accuse the Wall Street giant of coaxing former County Treasurer Robert L. Citron into buying securities that were ill-suited for an investment pool serving public agencies, and knowingly extending Citron credit that far exceeded limits imposed by the state Constitution. Officials are seeking at least $2 billion in damages from the brokerage house.

Merrill Lynch and the other defendants have denied any wrongdoing. “Merrill Lynch views Robert Citron as being in charge of Orange County’s investment decisions at all times,” said spokesman Timothy Gilles.

Hennigan, Mercer and Bennett, the law firm that handled Orange County’s emergence from bankruptcy, is spearheading the litigation effort.

The firm has received $13 million so far from the county strictly for its bankruptcy work. The bills were reviewed by the U. S. Bankruptcy Court as well as by county officials, who followed a detailed set of rules in determining payment.

For example, the county usually paid the fees of just one attorney when several lawyers from the same firm attended hearings or meetings. Officials only paid for coach airline fares, rejected bills for lavish meals and set standard rates for photocopies (15 to 20 cents per page) and faxes ($1 per transmission).

The county also required documentation for all expenses, refused to pay secretarial overtime, word-processing charges or surcharges on items like online document searches.

But under the current arrangement, litigation bills don’t need to be reviewed by the court, and Hayes is under no obligation to follow the county’s payment rules.

“Some rules are the same, some rules are different. Both are achieving the same goal” of keeping costs down, Bennett said. Hayes “has made it clear up front what he will and will not compensate, and what he will accept and won’t accept.”

Bennett declined to be more specific, however, saying release of individual bills would provide the county’s legal opponents with a sensitive information.

“We don’t prepare a separate redacted statement for Mr. Hayes,” Bennett said. “He gets statements that are road maps to our thinking and what we are doing.”

Christopher D. Cameron, a bankruptcy law expert at Southwestern University College of Law in Los Angeles, said greater public review is possible without compromising the case.

He said the Bankruptcy Court could have insisted on monthly or quarterly hearings in which investors and the public could ask attorneys questions about the case.

“There should definitely be some kind of public airing,” he added. “It would give investors a chance to ask some hard questions. They might not get answers, but at least it would be a forum.”

Cameron also expressed concern that the Bankruptcy Court is not reviewing individual attorney bills, which he said heightens the possibility that inflated bills could go through.

“With some lawyers, there is a great temptation to run up bills when the client is the public sector,” he said. Courts “love to cut [these] fees.”

Bennett said Hayes could choose to hold a final settlement hearing in Bankruptcy Court once the litigation is complete, giving pool investors and others a chance express their viewpoints. But such a hearing is not required under the recovery plan, he said.

Despite concerns about a lack of public oversight, many of the government officials who put together the $50-million fund expressed full faith in Hayes not only to limit costs but to guide the cases to successful conclusions.

“No one else comes close to understanding the intricacies of the bankruptcy,” said Irvine City Manager Paul Brady. “Of all the people we looked at, he was the one who had the respect . . . of all sides. Tom Hayes was the person.”

In selecting Hayes, pool investors also established a subcommittee to oversee his work. Individual subcommittee members have spoken to Hayes about litigation matters, but the panel has never formally met since its creation nine months ago to give him direction or advice.

* TOUGH ISSUES: O.C. supervisors tackle problems in the more informal setting of a regional park. B1