Legal Maneuvering Intensifies In Orange County Crisis With PM-Orange County-Bankruptcy, Bjt
Undated (AP) _ Legal brawling over the Orange County fiscal fiasco has intensified. Wall Street lenders ignored a county vow to sue them, and angry bondholders sued the county’s money managers for financial recklessness.
Orange County supervisors, grappling with a third day under bankruptcy court protection, said Thursday they’d sue investment firms that sold securities held as collateral for loans to the county. The supervisors contended those sales violated bankruptcy laws designed to protect debtors.
Smith Barney Inc. brushed aside the warning and sold $800 million in securities it held. Bond traders said others were selling lesser amounts.
″Our primary concern at this moment is to inspire confidence in the county and bring a calm atmosphere back to the investment markets,″ Board of Supervisors Chairman Thomas F. Riley said in a statement. ″We are outraged that some broker-dealers have elected to ignore the law and have only contributed to the uncertainty that has confronted us in recent days.″
Meanwhile, a class action lawsuit was filed in U.S. District Court in Los Angeles on Thursday against Orange County’s former Treasurer, Robert L. Citron, acting Treasurer Matthew R. Raabe, and investment banks Merrill Lynch & Co. and Smith Barney.
The lawsuit, filed on behalf of individual bondholders, alleges Citron, Raabe, and Merrill Lynch recklessly invested public money entrusted by the county and more than 180 other agencies.
The county is the largest local government ever to seek bankruptcy protection. The Board of Supervisors filed for Chapter 9 protection on Tuesday after learning that the county’s $20 billion investment pool had lost $1.5 billion in high-yield, high-risk investments.
Several major brokerage firms in recent days collectively have sold billions of dollars of bonds pledged to secure short-term loans to Orange County.
Smith Barney spokesman Robert Connor confirmed the New York investment bank sold $800 million in federal agency bonds on Thursday it held against short- term loans known as reverse repurchase agreements. The investment bank ″incurred no losses″ from the sale and said it represented their entire investment position.
At the close of business in New York, Smith Barney hadn’t been notified of any lawsuit from the county, he said.
Smith Barney and other firms said their review of bankruptcy code shows they could legally sell the securities.
The class-action lawsuit centers on statements about the county’s healthy financial condition as it issued ″billions″ of dollars worth of municipal bonds and related securities to individual investors since 1993.
The lawsuit claims the official statements issued with the municipal securities ″uniformly misrepresented the severe investment risk and imprudent strategy″ employed by Citron, Raabe and the county’s underwriters.
The plaintiff in the case is Leetate Smith, who purchased $15,000 of an unspecified issue of Orange County muni bonds since 1993 on behalf of the Smith Family Trust.
″This lawsuit is unfortunate but predictable,″ Merrill Lynch said in a statement. ″We do not believe we have any liability and we will contest the lawsuit vigorously.
″For Merrill’s financing activities, all appropriate financial disclosures were made,″ the company said.
Smith Barney said it hadn’t seen the lawsuit and declined comment. Sandra Sternberg, a spokeswoman for Orange County, hadn’t seen the lawsuit and declined comment.