2 Firms Settle in O.C. Bankruptcy for $17.9 Million

Two more financial firms agreed Thursday to pay a total of $17.9 million to settle lawsuits over Orange County’s 1994 bankruptcy, bringing the county’s recoveries to more than $800 million and hastening a showdown over its remaining claims.

Dain Rauscher Inc., which advised the county and four school agencies on municipal bonds they issued in 1994, agreed to pay $10 million. The county accused the firm of failing to sound alarms about the risks the county treasury was running.

Fuji Securities Inc., a onetime county broker, will pay $7.9 million now and up to $8.6 million later if it loses some key legal rulings on appeal. It was accused of providing illegal investments to the county and cheating the county when the firm sold securities it had held as collateral.

Both firms denied any wrongdoing or contribution to the county treasury’s loss of $1.64 billion but said they settled to avoid further litigation expense.

The agreements leave Standard & Poor’s, a bond-rating service owned by McGraw Hill Cos., as the only major defendant in the case. Fuji and Dain Rauscher had been set for trial before S&P;, which the county now hopes to schedule for trial next March.

“We have always believed that Standard & Poor’s is one of the major lawsuits, and the settlement today puts the case on a fast track,” said James W. Mercer Jr., one of the county’s lawyers.

The suit contends S&P; had a duty under its contract with the county to warn of the investment risks being taken by former Treasurer Robert L. Citron.

S&P; pronounced the treasury sound and rated the county’s bonds highly in spring 1994, despite well-publicized warnings of impending financial calamity from John M.W. Moorlach, who was in the middle of an unsuccessful run for county treasurer.

S&P; “didn’t do their homework,” said Moorlach, who became the treasurer after the bankruptcy. “They testified that everything was fine--and that gave a lot of public officials comfort that everything was fine.”

S&P; contends it was misled by Citron, who later pleaded guilty to financial felonies, and his assistant, Matthew Raabe, who was convicted of fraud.

McGraw Hill spokeswoman Leah Johnson said her firm will soon file the latest in a series of motions asking the judge to dismiss the suit and will “fight it vigorously” at trial if those attempts fail.

On another legal front, Thursday’s settlements will hasten an appeal of an important court ruling against Orange County. At issue are Citron’s investment techniques.

To multiply his bets on low-interest rates, Citron borrowed billions of dollars from his brokers through financial arrangements known as reverse repurchase agreements. He reinvested the proceeds in hopes of making an extra profit.

When rates rose sharply in 1994, the strategy compounded the county’s losses. The county suits contend it was so risky it was illegal.

But on a motion by Fuji, U.S. District Judge Gary L. Taylor ruled in October that state law permits treasurers to use reverse repurchase agreements, even to the extremes employed by Citron.

Fuji’s settlement allows the county to appeal that ruling immediately.

The settlement includes $6.5 million to cover a claim that Fuji withheld proceeds from selling county securities it held as collateral for loans.

On the claim that Taylor invalidated--providing illegal reverse repurchase agreements--Fuji agreed to pay $1.4 million now. Should appeals judges decide that the reverse repurchases were illegal, it agreed to pay up to $8.6 million more, capping a liability that otherwise could be much higher.

A final decision on the issue will determine whether the county proceeds with pending lawsuits against 11 Wall Street firms.

The brokers include such well-known names as PaineWebber, Smith Barney, Prudential Securities and Kidder, Peabody. While they were minor players in the Orange County debacle, they could be forced to pay large damages if the county prevails in arguments that they furthered Citron’s illegal strategies.

The four Wall Street firms involved most deeply with Citron already have settled for $590 million, including a $420-million civil settlement by Citron’s chief investment house, Merrill Lynch & Co.

Settlements with the county total $799 million. When interest is included from settlement funds being held in escrow accounts, the amount exceeds $800 million.

This week, Taylor week ruled that the first $703 million of those settlements were financially fair and had been made in good faith.

But distribution of the funds has been held up by wrangling over how the amounts recovered so far will be used to offset any additional damages against Standard & Poor’s and the 11 brokers.