$75-Million Settlement Could Be Crucial Step

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 some $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,” Supervisor William G. Steiner said. “The dominoes are beginning to fall.”

Legal experts and Wall Street analysts said the settlements amount to an impressive start but point out 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 on June 15, when a federal judge is scheduled to hold hearings that could have an impact on the county’s civil cases against about 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 a type of exotic investment, known as reverse-repurchase agreements.

Citron ran an investment pool on behalf of the county and more than 200 local government 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 some 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. Sources said such a ruling would be especially harmful to cases involving firms that had limited knowledge of Citron’s investment practices.

The judge’s decision, however, is expected to have only a limited impact 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. They also have charged that Merrill Lynch knew far more about the county’s perilous financial situation than any of the other defendants and is by far the most liable. The issue of whether Citron’s practices were illegal represents only a portion of the county’s case, sources said.

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.

Proceeds of all bankruptcy-related settlements are distributed to the cities, the county, school districts and special districts under a complex formula worked out in 1995.

School districts received the lion’s share of last month’s $45-million settlement by the LeBoeuf, Lamb, Greene & MacRae law firm, which worked as the county’s bond counsel. School districts will begin receiving additional money once the total reached through all settlements reaches $588 million.

Cities and special districts will share the $75 million from Peat Marwick as well as the $52.5 million that Credit Suisse First Boston Corp. agreed to pay earlier this month. The county charged that First Boston sold high-risk bonds not suitable for investing.

Irvine, for example, is expected to receive about $4 million from the settlement, but is still owed more than $50 million, according to City Manager Paul Brady. The city will likely place the money in a fund to pay for future road projects, parks and other capital needs.

In announcing the settlement Tuesday, Peat Marwick stressed that it was not accepting any responsibility for the county’s financial problems.

“While we are glad to put this litigation behind us, we still find it appalling to have to pay for a legal defense, and now a legal settlement, when we remain absolutely convinced that KPMG was and is without responsibility for Orange County’s investment losses,” the firm said in a statement.

But some legal and financial experts said the settlement leaves a far different appearance.

“It’s a large chunk of money,” said Ron Rus, an Irvine bankruptcy attorney. “It can’t just be called the cost of doing business. It’s a recognition of culpability.”

Rus said it makes sense for Peat Marwick to settle now because “the payment would only get bigger the closer you get to trial.”

The county benefits by fattening its settlement pot, which some experts said raises the price Merrill Lynch must pay if it wants to avoid a trial.

Zane B. Mann, publisher of California Municipal Bond Advisor, said the decision by Peat Marwick and the other firms to settle is driven in part by their insurance companies, which are less likely than company executives to want to risk the exposure of a trial.

Still, Mann and others said winning huge settlements from some of the remaining defendants will prove difficult.

“When this is all over, I still don’t think the county is going to recoup all its bankruptcy losses,” he added.

John C. Coffee Jr., a law professor and bankruptcy expert at Columbia University, said the settlements so far have involved “secondary players” in the bankruptcy. Merrill Lynch clearly is the county’s prime target but is unlikely to want to pay a significantly larger settlement than other defendants.

Under the Peat Marwick agreement, 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 split an additional $14 million to settle separate suits against the firm.

The deal has been in the works for months, and all but one agency had signed off on the settlement as of Monday evening.

The one holdout was the Orange County Water District, where some board members felt the agency deserved more money. But the board met Tuesday morning and approved the deal, which still needs to be reviewed by a federal judge.

Board members and water district executives declined to comment on the decision on the advice of counsel.

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