Orange County, Auditor Settle for $75 Million

The biggest settlement so far in Orange County’s campaign to recoup its bankruptcy losses received final approval Tuesday, beginning what experts predict will be an intense summer of legal maneuvering and private negotiations that might result in more deals.

With the agreement that the county’s outside auditor, KPMG Peat Marwick, would pay $75 million to settle a civil suit, the county has regained about $200 million from firms it has accused of contributing to its 1994 bankruptcy.

“We are entering a very critical period in our civil cases. A lot is going on, and I think we can expect more settlements,” said Supervisor William G. Steiner. “The dominoes are beginning to fall.”

Legal experts and Wall Street analysts said the settlements amount to an impressive start, but they note that the total is just a fraction of the $1.64 billion the county lost in the financial collapse.

The next major step in the county’s efforts comes June 15, when a federal judge is scheduled to hold hearings that could have an effect on the county’s civil cases against 20 other Wall Street firms.

At issue in the hearing is whether former Treasurer-Tax Collector Robert L. Citron--and by extension the firms that did business with him--violated state law by using an investment called a reverse-repurchase agreement.

Citron ran an investment pool on behalf of the county and more than 200 local agencies that lost the money, causing the largest municipal bankruptcy in U.S. history.

If the judge rules that Citron’s actions were illegal, Orange County’s cases grow stronger because its attorneys could argue in court that the firms were also breaking the law, according to legal experts and county sources.

But if the judge rules that Citron didn’t violate any rules, the county’s case against some defendants weakens because attorneys couldn’t tell jurors that the firms’ work for Citron was illegal.

However, the judge’s decision is expected to have only a limited effect on the county’s biggest case, against Merrill Lynch & Co.

County attorneys argue that the Wall Street giant played a central role in Citron’s investment scheme, knew far more about the county’s perilous financial situation than the other defendants and is by far the most liable.

The suit seeks at least $2 billion in damages. Merrill Lynch has repeatedly denied any wrongdoing and said blame for the bankruptcy rests squarely on the shoulders of county officials.

After more than a year of depositions, the case against Merrill is scheduled to begin in September. This week, the case was moved to federal court in Los Angeles.

Under the KPMG agreement, still to be reviewed by a federal judge, the agencies that invested in the pool would receive about $61 million. The Orange County Water District, the Orange County Transportation Authority and the city of Orange would also split $14 million to settle separate suits against the firm.

Times staff writer E. Scott Reckard contributed to this report.