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O.C., Brokerage Reach $52.5-Million Settlement

Litigation: It is the third bankruptcy-related deal of that magnitude. Credit Suisse First Boston admits no wrongdoing.


A brokerage that Orange County sued over its staggering bankruptcy settled the case Friday for $52.5 million, breaking ranks with 19 other Wall Street firms.

County leaders predicted more major settlements will follow their agreement with the firm, Credit Suisse First Boston.

The brokerage and others were accused of lending former county Treasurer-Tax Collector Robert L. Citron so much money to pour into risky securities that they violated the law. The county also contended the firms concealed huge profits they made selling the high-risk securities, which eventually contributed to the collapse of the county treasury.

First Boston admitted no wrongdoing. The firm said it settled the lawsuit to put "unpredictable and distracting" litigation behind it.

It is the third multimillion-dollar settlement of bankruptcy-related claims so far.

Earlier this year, the LeBoeuf, Lamb, Greene & MacRae bond law firm agreed to pay $55 million to settle claims by the county and a college district that lost money in the financial debacle. The firm served as the county's bond counsel in the months leading up to the financial collapse in December 1994.

Previously, Merrill Lynch & Co., Citron's main investment house, agreed to pay $30 million to end a separate criminal investigation. The settlement included $3 million to cover the costs of the probe.

The county's main shot at recovering the vast losses sustained by it and 200 schools, cities and local agencies is Wall Street--an industry that until recently had made no payments in the civil case, which is scheduled for trial Sept. 15.

The First Boston payment, which must be formally approved in court, passed muster with former California Treasurer Thomas W. Hayes, who is overseeing a $50-million litigation war chest set up as part of the plan that got the county out of bankruptcy.

Hayes called the settlement a good one, saying it "is indicative of the strength of the case against First Boston and the strength of the action against the other defendants."

William G. Steiner, the only current county supervisor who was in office at the time of the bankruptcy, predicted other Wall Street firms also will come to terms with the county.

"I think we're going to see more settlements as we get closer to trial," Steiner said.

The county has recovered $126.5 million of its losses so far: $52.5 million from First Boston, $45 million from LeBoeuf, $27 million from the Merrill Lynch criminal settlement and $2 million from a complex financial transaction with financial firms after the bankruptcy.

Under the agreement that got the county out of bankruptcy court, schools received $54 million from settlements first. The next $325 million is going to cities and local agencies. After that, the county government is in line to receive as much as $202 million of any funds recovered.

Last December, First Boston agreed to pay $990,000 to settle claims by municipal bondholders burned by the bankruptcy. First Boston and 13 other investment houses that marketed county bonds were accused of misleading the investors about the financial strength of the county and its treasury.

The brokerage and two of its employees also had paid $870,000 to settle a related case brought by regulators at the Securities and Exchange Commission. The firm said it no longer has any significant liability in the Orange County mess.

Among Wall Street firms, Merrill Lynch appeared to have the most potential liability in the county's civil case. First Boston did not have the close relationship to Citron that Merrill did and sold the county only a fraction as many risky securities as Merrill sold.

But First Boston was clearly one of the most prominent defendants after Merrill Lynch. It had loaned Citron 20% of the funds he used to buy securities that benefited from low interest rates.

When the Federal Reserve Board raised rates sharply in 1994, hammering the county's investments, First Boston was the first brokerage to sell the county-owned securities that it had held as collateral for the loans. That started the flood of losses of taxpayer funds that ultimately totaled $1.64 billion.

The $52.5-million payment by Credit Suisse First Boston represents 3.2% of the county's total loss and is small compared with the firm's earnings. The global financial company had a pretax profit of more than $1.5 billion in 1996.

But the county's attorneys described the settlement as a good one for both sides. "By any measure, it's a big settlement," said James Mercer, one of the lawyers.

Merrill Lynch spokesman Bill Halldin declined to comment on the Credit Suisse case. Merrill maintains that Citron charted his own course and that, if there is any blame to be put on the brokerages, it should fall broadly upon those that loaned Citron funds--meaning a wide range of other firms.

All told, the county filed 15 civil lawsuits against 28 defendant groups, including legal, accounting and advisory firms as well as the 20 Wall Street firms.

Other major defendants are the accounting firm KPMG Peat Marwick, which the county contends should have raised a red flag about Citron's investments, and the bond rating firm Standard & Poor's, which failed to detect the extreme risks to the county treasury. Those companies say they were deceived by Citron and then-Assistant Treasurer Matthew Raabe.

To settle criminal charges, Citron pleaded guilty to six felonies and served time in a county work program. Raabe, who was convicted on the same charges and sentenced to three years in prison, remains free pending an appeal. Criminal charges against other county employees were thrown out or bargained down to misdemeanors.

The SEC previously settled bankruptcy-related civil charges of wrongdoing against the county and several of its former officials, including Citron.

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