Option B Investors More Hopeful of Full Recovery

The persistence of a small band of dissident Orange County investors that refused to be bullied into going along with the county’s bankruptcy solution may finally be rewarded, officials said Wednesday.

The 14 cities and agencies that would not turn over to the county their right to sue Merrill Lynch are now in position to strike a deal or press forward with a lawsuit that may prove more individually lucrative than the $420-million settlement that was announced Tuesday.

That settlement, and others received so far from the county’s bankruptcy-related litigation, still leave most of the 200 entities that lost money in the county’s investment pool with less than they had invested. Losses totaled $1.64 billion.

But the investors dubbed the “Killer Bs”--because they chose option B of the county’s plan to emerge from bankruptcy--stand to get all of their money back plus damages if their lawsuit against Merrill, now on appeal, goes forward and succeeds.

Based on Tuesday’s announcement, the Bs are counting on a settlement. And officials and lawyers for the group say Merrill has even more incentive to settle with them because, unlike Orange County, they are “innocent” investors who simply invested money in the county’s ill-fated pool.

“We were noisy and wouldn’t play along, so the county said, ‘Put them on an iceberg and let them freeze to death,’ ” said Michael Martello, city attorney for Mountain View, a Northern California investor. “We happily went on that iceberg.”

The group, which includes the Orange County cities of Buena Park and Yorba Linda, lost more than $44 million. So far, it has received $24.5 million in cash and notes--including $9 million from the money Merrill agreed to pay Tuesday.

“We think we will easily receive $40 million to $60 million more,” Martello said.

And that’s just the amount it would take to make the Bs whole, said Michael Kahn of the San Francisco law firm of Folger, Levin and Kahn, the group’s lawyer.

“Very frankly, our claims are much stronger than [Orange County’s] because we were literally innocent parties,” Kahn said. “Merrill Lynch paid all that money to a party they thought they could prove allegations against.

“As I see it, Merrill Lynch is in more hot water than they were before because we don’t have those problems. Their exposure to us is greater.”

Kahn said the group was cheered by Merrill’s agreement to pay the Irvine Ranch Water District $17.1 million to settle its lawsuit against the investment firm. “Our claim is virtually identical,” he said.

As the county did, the Bs alleged they were duped and suffered from the same Merrill investment scheme that ultimately caused $1.64 billion in losses and triggered the bankruptcy.

Merrill spokesman Bill Halldin denied the firm acted improperly, and noted, “They have been unsuccessful in both state and federal court.”

Dan Wallace, speaking for Santa Barbara, said the Bs “feel we did the right thing. The cities wanted to trust in their own judgment and not place their faith in the county under the circumstances.”

James Markman, who represents Buena Park, said, “It all boiled down to who had the better chance” to get all their money back: the Bs with their own lawsuit or all the agencies that assigned their litigation rights to the county in exchange for a share of what was recovered.

“Right now we’re pretty happy,” Markman said.