Hopes Dim for Quick Settlement of Bankruptcy Suits

Chances have faded for a quick resolution of the remaining lawsuits stemming from Orange County’s $1.64-billion investment loss and bankruptcy.

U.S. District Judge John G. Davies, who mediated a historic settlement with Merrill Lynch & Co. last month, tried but failed to resolve county suits against 20 additional defendants, according to sources familiar with the negotiations.

Meetings since the June 2 Merrill settlement have produced no additional deals, and Davies will soon retire.

Now, county lawyers say they are preparing for trials beginning in November against the brokerages, law firms and bond raters still named in lawsuits pending before U.S. District Judge Gary Taylor in Santa Ana.

Defendants complained that the county, which has in hand about $620 million in total settlement agreements with Merrill and others, took an overly hard line in dealing with the remaining cases.

“We were very discouraged and surprised because we thought the county was interested in getting a group deal together,” said an official at one of the litigation targets.

Davies, praised as instrumental in reaching the Merrill settlement, is retiring July 18 after 12 years as a federal judge in Los Angeles. “I just want to try something different,” said Davies, 69, who will become a private mediator.

Local federal rules require mediation attempts before trial. The rules would permit those still involved in the lawsuits to select Davies to oversee mediation if they so desire. “But that would be entirely up to the lawyers,” Davies said.

Merrill Lynch, Wall Street’s biggest brokerage, had been the county’s main investment house, and then became the main defendant in the county’s attempts to recover the investment loss.

To settle charges that it foisted unsuitable investments on the county, Merrill agreed to pay the county $400 million, pay a water district $17 million, and return $20 million in frozen county funds.

Taylor will determine later this month which of the remaining defendants will replace Merrill Lynch as the next defendant to go to trial. A Nov. 24 trial date has been set.

Potential candidates include Wall Street’s Morgan Stanley & Co., which like Merrill lent the county billions of dollars to buy complex, risky securities, and Standard & Poor’s, a bond ratings firm that failed to warn of the risks that then-county Treasurer Robert L. Citron was running.

A Morgan Stanley representative declined comment. A Standard & Poor’s lawyer vowed to go to trial, saying the firm believes it was misled by Citron and is protected by constitutional free speech guarantees.

County Supervisor William G. Steiner had said when Merrill settled that more agreements could follow within days. Those high hopes have evaporated for now, Steiner recently acknowledged. But he still predicted most of the cases would eventually be settled without trials.

“The gut feeling is that Standard & Poor’s may go to trial, but the others are going to settle eventually,” Steiner said.