In the end, Orange County's multibillion-dollar damage suit against Merrill Lynch & Co. came down to this: How much did the county really lose?
A federal judge figured that the county's investment pool actually lost $900 million--far less than the $1.64 billion loss the county reported after selling off the Wall Street securities that its former treasurer, Robert L. Citron, had purchased, mainly from Merrill Lynch.
Before some of those high-paying securities took a nose dive in 1994, however, the judge calculated that the county's investment pool had banked nearly $800 million in above average earnings.
In toting up its losses, the judge pointedly asked, how could the county ignore its winnings?
Citron, after all, had won a reputation for financial genius with his high-flying investments.
The man doing the arithmetic was U.S. District Judge John G. Davies during mediation sessions between Merrill and the county over the last three weeks in the judge's Los Angeles courtroom.
While the mediation was voluntary and could not have bound either party, it had the effect of bringing clarity and realism to the proceedings.
By halving the amount the county might reasonably expect to recover, even if the county won its case at trial, Davies put pressure on both sides to end their 42-month legal fight through a settlement.
Davies' calculations opened the door for Steve Hammerman, Merrill Lynch's lead attorney, to begin firing increasingly sweeter offers at former state treasurer Thomas W. Hayes, the county's litigation czar.
"When it got to $400 million, I don't think Tom Hayes, acting on behalf of all the bankruptcy participants, felt he could risk doing better at trial," said James W. Mercer, a key member of the county's legal team.
Combined with another $20 million in county money that Merrill had held since the 1994 bankruptcy and was agreeing to return, the county would be getting $420 million--nearly half the $900 million it might have won from a jury. Merrill also agreed to pay $17.1 million to Irvine Ranch Water District to settle a separate lawsuit.
The court-mandated mediation occurred as the county's legal team was rounding third base and feeling good about the prospects of crossing the plate if the trial went forward as scheduled on Sept. 15, said county lawyer J. Michael Hennigan, a veteran securities attorney.
With a $50-million litigation war chest at its disposal, and a new law firm that was virtually created to handle Orange County's bankruptcy woes, Hennigan said the county was ready for battle.
The firm representing the county had been formed by Hennigan and Mercer, two leading trial attorneys in Los Angeles, who were joined by Bruce Bennett after he was named the county's lead bankruptcy attorney.
Despite the arcane investment terms and complex legal issues they would have to present to a jury, "we felt very confident about our case," Hennigan said.
That said, Hennigan said that it would have been dangerous for Hayes "to gamble" that a jury would award Orange County more than the $420 million Merrill was willing to hand over.
California's "comparable fault" laws, said New York University securities law professor John Coffee, apparently also played a role.
He cited a recent case involving a computer firm in Northern California that blamed its bankruptcy on its investment banker. The jury found that the banker was responsible for only 39% of the company's losses.
Mediation gave both Merrill and the county protective cover for the settlement, Coffee said.
"It permits Orange County, which has long said that Merrill Lynch owes it billions in damages, to tell people it went through the mediation and saw the settlement as realistic," he said.
Others said the settlement revealed there were holes in the county's case.
"This is so much less than what the county has been asking for, and it shows that . . . it was Citron and the five supervisors who were at fault here," said Zane B. Mann, publisher of the California Municipal Bond Advisor.
"They were daydreaming to think they were going to get $2 billion, but they said it for political reasons."
Settling also made sense for Merrill Lynch, said Mann, who noted that the brokerage could now begin repairing its tainted image.
And Jon Schotz of Saybrook Capital, who advised the 200 outside agencies and cities that lost money in the investment pool, said, "I love to get the cash and get out of the room."
With the money from Merrill, and what the county expects to recover from the 20 other lawsuits still pending, Schotz said, "we will be at almost 100%. So I think it's a great thing for everybody. A trial would have been very destructive."
For others, the total was not impressive.
Irvine attorney Ron Rus, who represented several pool investors, said, "If we can believe what the supervisors told us Merrill was willing to pay at the outset [around $500 million], it looks like they ended up where they were two years ago. It's hard to see where the cities gained anything."
But county officials applauded the settlement.
Supervisor Todd Spitzer called it "an excellent settlement, especially when you consider that the county had unclean hands in all of this."
William J. Popejoy, who briefly ran the county after the bankruptcy, called it "another giant step toward getting the whole tragic mess behind the county."
Popejoy once tried to negotiate a global settlement of about $800 million with Merrill, he said.
Treasurer-Tax Collector John M.W. Moorlach, who as a private citizen was the first to raise concerns about Citron's investments nine months before the 1994 bankruptcy, said, "If we received every dollar back that we lost, we wouldn't have learned anything," Moorlach said. "Sometimes you need to feel a little pain so that the next time a similar situation comes up, you will remember it hurt."
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* County legal fees: $17.3 million
* Amount Merrill Lynch made off county investments from 1992-94: $100 million
* People convicted: Two
* County employees laid off: About 800
Bankruptcy-related settlements now total more than $600 million. The tally:
Amount $400 million
Source Merrill Lynch & Co., primary broker to the county prior to the bankruptcy (plus $20-million return of excess collateral) *
Amount $75 million
Source KPMG Peat Marwick LPP, accountants for the county, Orange County Transportation Authority, city of Orange and the Orange County Water District
Amount $53 million
Source Credit Suisse First Boston Corp., one of the county's brokers which entered into reverse repurchase agreements and sold securities
Amount $45 million
Source LeBoeuf, Lamb, Green & McRae LLP, attorneys for the county and numerous school districts
Amount $27 million
Source Merrill Lynch payment to terminate criminal investigation
Amount $1 million
Source Recovery on taxable note claim
Amount $1 million
Source Recovery on fidelity bond
County Cases Still Pending
The county filed 15 civil lawsuits against 28 defendant groups, including 17 additional investment firms. Companies involved in pending litigation with county (does not include cases filed by other agencies):
* Standard & Poor's Corp., county bond rating agency and advisor
* Rauscher Pierce Refsnes Inc., county financial advisor
* Brown & Wood, attorneys
* Morgan Stanley Group Inc.
* Fuji Securities Inc.
* Bear Stearns & Co. Inc.
* PaineWebber Inc.
* Nomura Securities International
* Smith Barney Inc.
* Sanwa Securities
* Citicorp Securities
* Cantor Fitzgerald Securities Corp.
* Daiwa Securities
* Dean Witter Reynolds
* Donaldson Lufkin & Jenrette Securities Corp.
* Kidder Peabody & Co.,
* Lehman Brothers Inc.
* Prudential Securities Inc.
* BA Securities
* Paribas Corp.
Here is a breakdown of the shares different government agencies will receive from county bankruptcy settlements so far. It does not include additional settlements several cities and water districts reached separately.
Non-school agencies: $325.2 million
County: $193.8 million
Schools: $54.7 million
Option Bs*: $9.0 million
Litigation representative: $6.0
* Cities that refused to give up right to file individual bankruptcy claims
Here is how all future bankruptcy settlements and court judgments will be divided:
School and non-school claims: 60.67%
Litigation representative: 1.50
Merrill Lynch's stock price jumped 31 cents per share on news that it settled a suit filed against it by Orange County. Weekly closing prices and Tuesday's close:
Tuesday's close: $89.06
Sources: Orange County Litigation Fund, Times reports, County of Orange; Graphics reporting by JANICE JONES DODDS, LOIS HOOKER, SHELBY GRAD and SCOTT RECKARD/Los Angeles Times