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O.C. Loses Key Ruling in Bankruptcy Cases

Courts: Judge says ex-Treasurer Citron had legal authority to invest. Decision has no effect on legal settlements already reached.


In a decision that severely limits Orange County's chances to recover more bankruptcy losses, a judge ruled Thursday that former county Treasurer Robert L. Citron had legal authority to make the high-risk bond investments that caused the debacle.

In lawsuits against former brokers and other professionals, the county contended the investments violated the California Constitution and state laws. It argued that Citron was never authorized to take such risks--and that the defendants therefore must repay the entire $1.64 billion lost in December 1994.

That contention was thrown out by U.S. District Judge Gary L. Taylor, in a 36-page ruling that the county's own lawyers called comprehensive on the legal issues involved.

However unwise Citron may have been in borrowing billions of dollars to bet on low interest rates, "there was authority to act," Taylor wrote. Even "grave errors" in exercising that authority are not prohibited by law, he ruled.

County lawyers said they probably will appeal the ruling, which negates suits against more than a dozen Wall Street firms that did business with Citron. With no evidence those firms realized the risks the treasurer was running, the theory that Citron exceeded his authority was the county's sole cause of action against them.

County lawyers have said privately that they had hoped to recoup more than $1 billion of the county's losses.

The decision has no effect on the $739 million in legal settlements already agreed to by a number of major defendants, notably $437 million from the county's former chief investment house, Merrill Lynch & Co.

Merrill Lynch settled the case rather than risk an unfavorable ruling on the issue of Citron's authority--a decision that now seems unfortunate for the big Wall Street firm. A Merrill Lynch spokesman declined to comment.

Also unaffected are several other settlements with Wall Street firms that have been signed but not yet announced, said J. Michael Hennigan, a lawyer for the county.

He said those deals will bring the total recovery to about $770 million for the county and 200 school districts, cities and special agencies that lost money in the financial debacle.

The judge's ruling came on a motion made by one of the Wall Street firms named in the county's lawsuits, Fuji Securities Inc., a subsidiary of Japan's Fuji Bank Ltd.

Taylor's ruling leaves Orange County with only a minor claim against Fuji: that the firm defrauded it of $6 million to $10 million when it liquidated securities held as collateral for loans to Citron in December 1994.

Fuji's lawyer, Milwaukee attorney Nancy J. Sennett, couldn't be reached for comment.

Taylor's ruling notwithstanding, the county can proceed with lawsuits against Standard & Poor's Inc., which gave county municipal bonds top ratings before the bankruptcy, and against Dain Rauscher Inc., which advised the county on issuing those bonds.

Standard & Poor's applauded the ruling, however, noting that it negates a part of the county lawsuit that contended the bond ratings agency should have warned that Citron was pursuing an illegal course of action.

"The court appears to recognize that the county has overreached in some of its theories," said a spokeswoman, Leah Johnson. "We are pleased and believe today's ruling will benefit Standard & Poor's."

Dain Rauscher officials couldn't be reached.

Hennigan, the county's lawyer, said Taylor didn't overlook any important issues in ruling against the county.

"We've reviewed the opinion," he said. "It appears to us the judge has carefully considered all of the arguments. And although we disagree with the outcome, we are pleased with the level of deliberation."

Hennigan said the county will ask Taylor to allow an immediate appeal of the issue of Citron's legal authority. If the judge refuses, an appeal would have to wait until after the minor claim against Fuji is tried, he said.

The defendants claim the county's loss actually is about $900 million--the $1.64-billion loss minus the huge extra earnings that Citron's investments yielded in the years before his bets came up losers.

Especially when considered against the lower loss figure, the $770 million recovered so far is much more than most experts believed Orange County would achieve. And the legal contention that Citron exceeded his authority, even if tossed out in the end, was the major motivator for the settlements, Hennigan said.

"If we were never right about this," he said, "then it just goes to show, as Paul Newman once said, sometimes nothing is a real cool hand."

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