County Legal Fees in Bankruptcy Suits $10.7 Million So Far

In the 12 1/2 months following Orange County’s emergence from bankruptcy, attorneys and other outside professionals were paid $10.7 million for pressing civil litigation against Merrill Lynch & Co. and 16 other firms the county blames for causing the 1994 financial collapse.

The outlay, revealed Tuesday in an audit required by the state Legislature, represents about one fifth of the $50 million the county set aside for lawsuits that officials hope will recoup most if not all of the $1.64 billion lost by the county, as well as the cities, schools and special districts with money in the county’s ill-fated investment pool.

The audit covers the period from mid-June of last year, when the county’s bankruptcy recovery plan was approved, through the end of June this year--15 months before the case against Merrill Lynch is scheduled to go to trial, and perhaps several years before the other cases enter the courtroom.

Still, Thomas W. Hayes, the former state treasurer who is overseeing the litigation effort, said he has enough money to bring the litigation to a successful conclusion without exceeding the $50-million cap.

“This audit shows we have the resources to pursue each and every lawsuit,” Hayes said during a press conference Tuesday morning in Irvine.

Some critics have expressed concerns about the large sums already paid to outside attorneys and financial consultants hired to help the county recover from bankruptcy.

As of this summer, those bills totaled more than $42 million, and some of the $10.7 million in newly disclosed legal and consulting fees is going to some of the same firms.

Hayes and other county officials said the latest spending is justified, given the complexity of the cases and the even greater resources being expended by Merrill Lynch and other firms.

“I feel we are going to be successful, but it’s going to be a difficult case,” Hayes said. “It’s expensive to pursue this kind of litigation. The other side is spending more than we are. I won’t be outgunned.”

Hayes said that about 90% of the $10.7 million went to several law firms, including Hennigan Mercer & Bennett, and Sheppard, Mullin, Richter & Hampton. A smaller portion of the money went to the Arthur Andersen accounting firm for financial consulting work.

Both Hennigan Mercer & Bennett and Arthur Andersen were key players in the county’s recovery from bankruptcy in 1995 and 1996. Beyond its current work on the litigation front, Arthur Andersen was paid more than $11 million by the county for bankruptcy-related services, while the law firm was paid $13 million.

The audit, prepared by the Wright Ford Browning & Young accounting firm in Irvine, was required as part of state legislation that enabled the county to emerge from bankruptcy in June 1996.

The audit did not break down the fees of individual lawyers or consultants, nor did it detail which specific services the bills covered. Attorneys have said releasing detailed billing records could jeopardize the county’s case, since its opponents could gather valuable insights into the county’s legal strategy if they knew exactly how much money was being spent for what.

According to the firm, auditors reviewed the individual bills and found no irregularities. The $10.7 million in outlays was offset by $2.9 million in earnings on the $50-million fund created from the sale of county bonds.

Hayes said all bills are reviewed by him, an assistant and a representative from the more than 200 agencies that lost money in the county investment pool’s collapse.

The investors selected Hayes to manage the litigation fund last year, giving him broad authority to devise legal strategies, make payments to attorneys and settle cases.

Hayes said he and the attorneys decide legal strategies and where to spend resources during regular meetings. As a result, he said he is aware of general “dollar figures” before the bills arrive.

Attorneys are focusing most of their attention on the case against Merrill Lynch, which sold then-county treasurer Robert L. Citron many of the risky investments that eventually caused the bankruptcy. The Wall Street giant has repeatedly denied any wrongdoing, but has refused to say how much it is spending on its legal defense.

Hayes said much of the legal spending covered the lengthy depositions related to the case as well as research and analysis. The trial is expected to begin in September 1998--if a settlement isn’t reached earlier. The county is seeking more than $2 billion for the brokerage firm.

The county’s attorneys are close to reaching their first civil settlement--a $50-million payment from LeBoeuf, Lamb, Greene & MacRae, a New York law firm that served as the county’s bond counsel.

The settlement, however, is being held up by the North Orange County College District, which is a party to the county’s legal action against the law firm and also has a separate legal dispute with LeBoeuf.

Attorneys for LeBoeuf say they will not sign off on the settlement and arrange for the $50-million payment unless the county gets the community college district to drop its separate suit, which is scheduled for trial before a San Diego judge in February.

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Litigation Fund Basics

Attorneys and other outside professionals pursuing litigation against firms the county holds responsible for causing its 1994 bankruptcy have spent more than $10 million of the $50-million fund set aside in June 1996. Here’s the basic fund accounting in its first year, all amounts in millions:

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Category Amount (millions) Amount set aside for litigation $50.0 Legal/consulting expenses through June 1997 -10.7 Fund interest/investment revenue 2.9 Litigation fund total as of June 1997 $42.2

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Source: Wright Ford Browning & Young