O.C. Closes the Legal Books on Fiscal Fiasco

Five years after its financial meltdown caused the nation’s largest municipal bankruptcy, Orange County on Tuesday dropped its final lawsuit from the debacle, clearing the way for 200 cities, schools, other agencies and the county itself to split up $860.7 million.

The money, generated from other lawsuits pursued by the county, will nearly make whole most of the investments in the county treasury and is far more than most observers had predicted would be recovered. It will be released this fall, bringing to a close a fiasco that shook Wall Street and undermined investors’ faith in what had been considered an ultra-safe municipal bond market.

The county settled Tuesday with the bond-rating service Standard & Poor’s, which it had sued for more than $2 billion. In the end, S&P; admitted no wrongdoing and agreed to refund just $140,000, representing a partial repayment of fees it charged the county for rating services in 1994.

Losses from former Orange County Treasurer Robert L. Citron’s bad bets on low interest rates had prompted predictions that public services would be devastated in one of America’s wealthiest counties.

But by budget-cutting, diverting funds from roads and beaches and taking on a whopping $1.2 billion in new debt, the cash-strapped county and its wealthy transit agency repaid bondholders in full--though a year late--and kept other agencies from collapse.

Schools--the top priority in the county’s bankruptcy escape plan--will have recovered 97% of their investments once they receive their share of proceeds from the lawsuit settlements, county officials said.

Cities and public agencies will recover 93%. But the county’s own funds will get back just 35 cents for every dollar of losses, according to figures provided by Tom Beckett, public finance manager for the county.

The recovery of the $860.7 million, including nearly $450 million from Citron’s main brokerage, Merrill Lynch & Co., “vastly exceeded what anyone expected” at the county, schools and cities when the litigation began, said J. Michael Hennigan, one of the county’s lead lawyers.

Investment experts were left “slack-jawed” by the success of the suits, said Zane Mann, publisher of the California Municipal Bond Advisor. Mann initially had called the suits nonsense, joking that the county would do better suing the psychics and astrologers that Citron had consulted rather than the county’s brokers, lawyers, accountants and bond raters.

Resolution of the county’s final lawsuit does leave one suit remaining: a separate action against Merrill Lynch filed by 14 cities and agencies that, unlike other investors in the pool, chose not to surrender to the county their right to sue the brokerage. It is pending in Contra Costa County Superior Court.

The county had accused Standard & Poor’s of breach of contract and professional misconduct in failing to sound the alarm about Citron’s strategies in 1993 and 1994, when S&P; gave its highest ratings to the county’s bonds.

S&P; had won a string of victories in federal trial and appeals courts, including a ruling that its operations were protected by the 1st Amendment unless it was shown to have issued false ratings intentionally or in reckless disregard for the truth. Kenneth Vittor, general counsel for S&P; parent McGraw Hill Cos., said the case will deter future lawsuits blaming ratings agencies whose opinions prove wrong.

The county’s law firm, Hennigan, Mercer & Bennett of Los Angeles, had reached a $21-million settlement earlier this month with the other remaining defendants, 12 Wall Street firms that had extended credit to Citron or sold him volatile securities.

But those and all the other recovered funds probably would have been tied up for months or even years while the S&P; case dragged on, officials said.