2 Criticized Firms May Get Role in Bond Sales

County supervisors today will consider hiring nearly 20 financial underwriters and attorneys to handle future bond sales, including two firms criticized for their part in Orange County’s 1994 bankruptcy.

The firms, Lehman Brothers Inc. and Smith Barney, Harris Upham & Co., were among nine companies that agreed to pay $4.4 million to settle a suit filed by holders of Orange County bonds.

They are also defendants in a civil suit brought by the county. The suits have been placed on hold until litigation against more than a dozen other defendants, most notably Merrill Lynch & Co., is resolved.

Gary Burton, the county’s chief financial officer, said the three firms have agreed to sign legal waivers stating that any business they do for the county does not alleviate any past responsibilities or liabilities.

Bond industry experts said it is not uncommon for governments and private industry to use the services of brokerage firms even as they battle them in court.

“In the industry, Smith Barney and Lehman Brothers have very good reputations, much better than Orange County’s,” said Zann Mann, publisher of California Municipal Bond Advisor, a newsletter. “I don’t think it’s a problem.”

Mann noted that the state of California is mired in a legal dispute with Bank of America concerning investment funds but continues to use the banking giant in bond underwriting.

The county is assembling a team of financial advisors who will help execute future financing for capital projects, which might range from additional jail facilities to a new courthouse. The firms were selected by three separate evaluation panels.

Salomon Brothers Inc., which helped the county manage its investment pool after the bankruptcy and helped craft a recovery plan, is slated to become the chief financial advisor.

Lehman Brothers and Smith Barney would handle some of the underwriting, along with two other firms. The county used Lehman’s services earlier this year when it refinanced some airport bonds.

“They did a great job, and we don’t see any risk of using them again,” Burton said. “To exclude them from doing business with the county would be shortsighted on our part.”

Sam Gruenbaum, an attorney at Cox Castle & Nicholson in Los Angeles and an expert on securities law, agreed.

“These institutions are so large and have so much depth in so many areas, it doesn’t make much sense to foreclose them from future dealings because they may have played a minor role” in the bankruptcy, Gruenbaum said.

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Orange County filed for bankruptcy on Dec. 6, 1994, after a county-run investment pool lost $1.64 billion. The losses were blamed on risky investment practices of former Treasurer-Tax Collector Robert L. Citron.

In its civil suit, the county accuses Merrill Lynch of contributing to the bankruptcy by selling Citron risky securities. The Wall Street giant has denied any wrongdoing.

The county’s suits against Smith Barney and Lehman Brothers were filed last December, just as its right to sue was about to expire.