Firm Agrees to Pay $75 Million for Bankruptcy

The Big Six accounting firm that gave Orange County’s books a clean bill of health in the two years before it filed for bankruptcy has agreed to pay $75 million to settle lawsuits over its role in the debacle, government sources said Monday.

The settlement with KPMG Peat Marwick is not final, however. It still requires the approval of the Orange County Water District, whose directors are split on

whether their proposed portion is too low.

The water district is one of four entities that contend that Peat Marwick should have sounded an alarm about the casino-style investments of former County Treasurer Robert L. Citron. The other three--the county, the city of Orange and the Orange County Transportation Authority--already have signed off on the pact.

If approved, the settlement would be one of the largest ever by an accounting firm stemming from a single chain of events, and the largest to date in the county’s attempts to recover its losses. The county treasury lost $1.64 billion when Citron’s bets on low interest rates went awry in 1994.

It also would push the amount recovered from Wall Street, legal and other professionals involved in the county bankruptcy to more than $211 million, four months before the county’s suit against its main investment house, Merrill Lynch & Co., is scheduled to go to trial.

The Orange County Water District was one of three government bodies to file negligence suits separate from the county’s action against Peat Marwick. The accounting firm, which had audited the district’s books as well as the county’s, has denied wrongdoing, saying its role was not to analyze Citron’s investment portfolio.

Under the proposed agreement, the water district, OCTA and the city of Orange would split $14 million, according to officials in county government and at the agencies.

The remaining $61 million would go to repay losses of other investors in the county treasury.

The water agency’s board discussed the proposal at a meeting Friday and was scheduled to take it up again this morning, said Wes Bannister, a board member.

He said some board members believed the $14 million was too little--the district originally sued for $126 million--but the situation wasn’t at an impasse.

“We had flip-flopped on the board both ways,” Bannister said. “A lot of the members feel that we really deserve to get more for our ratepayers. But we need to talk about this and that is why we’re holding [today’s] meeting.”

He wouldn’t disclose what portion of the $14 million was to go to the water board.

Peat Marwick spokesman George Ledwith declined to discuss the proposed deal in detail, saying only that the firm has been in discussions with the county.

The water district maintained that it was reassured about the safety of Citron’s investments from a partner at the accounting firm, Margaret J. “Peggy” McBride. But Peat Marwick maintained she never gave official advice and that the district’s own board minutes showed it relied on advice about the portfolio from First Interstate Bank and disclosures by then-assistant county treasurer Matthew Raabe.

James Mercer, a county attorney who played a central role in brokering a recent $52.5-million bankruptcy settlement with CS First Boston, said it’s county policy not to discuss any settlement talks. “We have no comment,” he said.

Ron Rus, a lawyer who recently won a $10-million settlement from Peat Marwick in a separate case involving educators’ losses in real estate investments, said $75 million is an “extremely large” number.

“It shows they have exposure far beyond the costs of litigation,” he said. “They’re probably making a very wise decision to settle now. It can get a lot worse if you wait [until trial] and bet the farm.”

So far, the county has won four major financial settlements. One of them, from Merrill Lynch, ended a criminal investigation of the brokerage’s role in the bankruptcy.

In its civil lawsuit, the county contends that star Merrill Lynch salesman Michael Stamenson duped Citron into making foolish bets on interest rates by buying securities that generated huge profits for the big brokerage firm.

Merrill Lynch has denied any wrongdoing, saying Citron was a sophisticated investor as well as the elected county treasurer, and charted his own course.

Without admitting guilt, Merrill Lynch settled the criminal complaint by paying $30 million, of which $3 million went to offset the costs of the district attorney’s investigation.

In the other settlements, CS First Boston, another of the county’s investment firms, agreed to pay $52.5 million. The county’s bond law firm, LeBeouf, Lamb, Greene & MacRae, agreed to pay $55 million, $10 million of which went to the North Orange County Community College District.

All told, 200 schools, cities and local agencies were hurt when the Federal Reserve Board raised interest rates sharply in 1994, making Citron’s huge bets on low rates come up losers.

Nearly all those agencies staked their hopes for recovery on the county’s federal suits. But some, like the three that sued Peat Marwick separately, were deemed to have separate causes of action and pursued separate suits.