Federal Judge Permits O.C. Liability Suit Against U.S.

SANTA ANA — In an unprecedented decision, a federal judge ruled Wednesday that Orange County can seek to hold the United States liable for allegedly helping to trigger the county’s financial collapse more than 2 1/2 years ago.

U.S. District Judge Gary L. Taylor said the county could maintain its suit alleging that government authorities and officials with several securities firms worked together to sell risky securities to then-Treasurer-Tax Collector Robert L. Citron.

Earlier this week, lawyers with the U.S. Department of Justice in Washington came to Santa Ana to plead with Taylor to dismiss the suit. This type of legal action involving the issuance of securities had never been allowed against the United States, according to Jack Kaufman, an attorney with the Justice Department.

But Taylor denied the request, ruling that the county could maintain its suit under a law that allows injured parties “suffering a legal wrong” to sue the government.

Michael Swartz, an attorney with Hennigan, Mercer & Bennett, a Los Angeles law firm representing the county, said he was pleased with the court’s decision.

“We believe the facts will demonstrate that the county was defrauded,” Swartz said. “We will be able to prove that at a trial.”

The county sued the federal government’s Office of Finance last year for misrepresentation and fraud, saying the agency acted on behalf of the Federal Home Loan Banks in transactions involving structured notes.

These notes turned out to be highly risky, according to county lawyers, and contributed to the county’s historic bankruptcy filing in December 1994.

The action against the Federal Home Loan Banks was among a long list of county lawsuits filed last December against more than 20 brokerage houses and others for their alleged roles in the bankruptcy. All have denied wrongdoing.

Several of those lawsuits involved structured notes of U.S. government agencies--including the Student Loan Marketing Assn., known as Sallie Mae, and the Federal National Mortgage Assn., or Fannie Mae, that were created and then brokered by Wall Street firms.

Structured notes are securities whose quarterly or half-yearly interest payments are computed according to formulas involving interest rates or other variables.

Swartz said Citron bought these securities believing they were safe and “properly priced.” The brokers did not disclose that the securities were sold to the county at a higher price than they were worth, Swartz said.

In several deals, after Citron paid more than the market rate for the securities, the securities dealers and agencies would split the profits, the county contends.

“The dealers would go to the agencies and say, ‘We have someone who is willing to buy at a wrong [higher] price,’ ” Swartz said. “ ‘What we want you to do is issue a structured note and we’ll split the profits with you.’ ”

“Citron was leaving money on the table,” Swartz said.

The county took legal action under a law that allows a government agency to be sued for an actions which are “an abuse of discretion or otherwise not in accordance with the law.”

Government lawyers claimed that the county’s suit was invalid because it did not challenge any significant government action.

But Taylor said he could find “no immunity as a matter of law.”