Bankruptcy Settlement Nears Close

A final report on lawsuits stemming from Orange County’s bankruptcy was filed in federal court Monday, clearing the way for more than 200 schools, cities and public agencies to recover their shares of about $860 million in settlements as early as next month.

The 2-inch-thick report was submitted by former state Treasurer Tom Hayes, whom the court had appointed to oversee the lawsuits on behalf of governments that lost a total of $1.64 billion in the December 1994 debacle.

U.S. Bankruptcy Judge John J. Ryan in Santa Ana scheduled a hearing Feb. 2 on the report, which details the course of lawsuits and settlements. Ryan must approve the final report before the money can be paid out. Hayes said unless opposition surfaces, the funds will be distributed Feb. 24.

“We’re not anticipating any opposition,” said J. Michael Hennigan, one of the county’s attorneys. His Los Angeles law firm, created specifically to handle the litigation, will oversee the final distribution of the funds.

Hayes said $794 million will be handed out next month and about $13 million will be distributed after the last of the legal fees is paid. The county’s schools already have received an initial payment of $54 million.

The county took on more than $1 billion in new debt as part of the plan under which it emerged from bankruptcy in June 1996. Through payments from that debt as well as from the settlements, the schools will end up with 97 cents for every dollar invested at the time of the bankruptcy. Cities and other public agencies will recover about 93 cents on the dollar. The county will get nearly 87 cents on the dollar.

High-risk investments by former county Treasurer Robert L. Citron caused the loss. Citron had speculated interest rates would fall or stay low, a strategy that earned huge returns for much of the early 1990s. But when the Federal Reserve raised rates sharply in 1994, the tactic proved disastrous.

The county sued professional firms for their roles in the disaster. The biggest recovery, nearly $450 million, was from the county’s main investment house, the Merrill Lynch & Co. brokerage.

Lawyers for the county accused Merrill of steering Citron into unsuitable investments, though Merrill contended he had been properly warned of the risks and had made the decisions on his own.

Others that settled included auditor KPMG Peat Marwick LLP for $61.4 million; Wall Street firms Morgan Stanley, Dean Witter for $69.6 million; Credit Suisse First Boston for $52.5 million; Nomura Securities International for $47.9 million; law firms LeBoeuf, Lamb, Green & MacRae for $45 million and Brown & Wood for $23 million. None admitted wrongdoing.

The funds were to have been distributed last fall, but a dispute over the fees to be paid to Hennigan’s law firm, Hennigan, Mercer & Bennett, delayed the payment. The firm wound up with $29 million.

Hayes will be paid about $9.8 million under a formula devised by the agencies that lost money. It called for him to get nothing until settlements totaled $200 million, then 1 1/2% of anything over that.

One bankruptcy lawsuit remains: a Contra Costa Superior Court case against Merrill Lynch by 14 cities and agencies that opted out of the main lawsuits.

In that case, which could go to trial as early as this summer, Merrill contends the cities and agencies voluntarily assumed high risks with Citron in pursuit of high returns. The cities and agencies received no advice from the brokerage and were well aware of public debates about whether Citron’s strategies were overly risky, Merrill Lynch spokesman Bill Halldin said.

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Bankruptcy Fallout

Under the terms of the plan that got Orange County out of Bankruptcy Court, each agency in the investment pool recovered a portion of every dollar on deposit. How much agencies got back:

Schools: 97.3%

Cities and public agencies: 93.5%

County: 86.8%

Source: Final reports to court on Orange County bankruptcy litigation.