County Makes Key Motion for Bankruptcy Suits

In a motion that could influence the outcomes of a dozen damage suits against brokerages Orange County blames for its bankruptcy, the county’s attorneys asked for a legal ruling Thursday on one issue common to them all--whether the billion-dollar loans the firms made to former Treasurer Robert L. Citron were barred by state law.

The county wants U. S. District Judge Gary L. Taylor to rule that the brokerages should have known that Citron had no legal authority to borrow the $14 billion that the firms loaned him to gamble on some of the riskiest securities ever devised by Wall Street.

Citron used virtually all of the borrowed money to enter into reverse repurchase agreements, a transaction in which the seller provides both the credit and securities being purchased.

If Taylor grants the county’s request and agrees that the loans were prohibited by a state constitutional provision barring cities and counties from borrowing more than they can repay from their annual budgets, the move could accelerate the resolution of the suits against Merrill Lynch & Co. and 11 other Wall Street brokerages.

“We think these are some of the more significant issues in the case,” the county’s lead litigation attorney, J. Michael Hennigan, said Thursday.

The county’s request came in its suit against Fuji Securities Inc., which had asked Taylor to dismiss portions of the county’s suit against the brokerage.

If Taylor determines that Fuji was precluded from entering into the transactions with Citron, the county would only need to prove that Fuji made the loans to the former treasurer in order to win its suit, according to Michael Swartz, an attorney for the county.

“It will move the case along significantly,” Swartz said.

If successful, the county will likely ask Taylor, who is presiding over the other bankruptcy-related suits, to make similar rulings in the cases against Merrill Lynch and the other brokerages.

All of the defendant brokerages have denied any wrongdoing in their dealings with the county.

The Orange County Investment Pool that Citron managed lost $1.64 billion in late 1994 as interest rates marched steadily upward, undermining the value of the securities he had purchased. Faced with such losses, the county declared bankruptcy in December of that year.

In a bid to recoup its losses, the county sued Fuji, Merrill Lynch, Morgan Stanley and nine other brokerages.

“The root cause of the disaster that befell the county is not complicated,” Hennigan said in court papers. It was made possible “with the seemingly limitless financial backing of the broker-dealers, who themselves earned hundreds of millions by facilitating Citron’s descent into financial madness.”

Even though the county’s request was filed in the suit against Fuji, attorneys served a copy to the other 11 brokerages, which are expected to vigorously oppose the county’s legal maneuver.

The Bond Market Assn. has argued that the $1.5-trillion market in reverse repurchase agreements would be at risk if California’s law is interpreted the way Orange County is asking. Municipalities across the county borrow money through repurchase agreements.

Swartz, an attorney for the county, said he would not be surprised if the brokerages raise the same argument.

“The only ruling that we are seeking is that a municipal treasurer cannot engage in unlimited borrowings when the state Constitution and state legislature have only given him limited powers,” Swartz said Thursday.

Fuji’s attorneys declined to comment Thursday.