For Investors, Attorney’s Bet Pays Off Today

Every group needs a motto, and the one attorney Patrick C. Shea offered the committee of participants in Orange County’s battered investment fund was simple: “Keep your eye on the ball.”

It worked for ringleader Stan Oftelie, the county transportation chief who for 15 years has coached club soccer teams. It rang true to financial adviser Jon Schotz, a lifelong Laker fan who began toting his toddler to games when she was just 18 months old. It made sense to school finance guru John Nelson, who hits the tennis courts each day before the sun.

The ball, in this case, was not round, yellow and fuzzy but flat, green and in large denominations.

“It’s not because it’s right, it’s not because it’s fair, it’s not for any higher purpose,” explained Shea, who represents the committee of investors. “You cut deals with [the county], deals that you hate, because they’ve got your money.”

Today, having watched the ball warily for more than five months, the committee that dubbed itself “G-7”--after the group of seven industrialized nations--will finally grab it. The line to collect checks for the billions left in the sunken fund is expected to form at sunrise.

Under a settlement approved earlier this month, pool participants are scheduled to receive 77% of their deposit back in cash today. Recovery bonds worth 13% for school districts and 3% for other agencies will be handed out next month, and IOUs are promised for the rest.

A few pool participants remain defiant, irked at the committee for walking away from a fight. But key players in some 200 hours of committee meetings, and negotiating sessions that stretched more than twice that time, believe it was Shea’s single-minded focus that forced the county to give the cash back just 164 days after it embarked on the uncharted journey through bankruptcy court.

“I’ve been in enough large bankruptcies to watch people get lost . . . and I’ve watched how they’ve done it,” said Shea, a Harvard- and Stanford-educated lawyer from La Jolla with two decades in the business. “People get involved in fights that they can’t win--or even if they do win, don’t amount to anything, don’t amount to any money.

“If there’s no money in it, don’t do it,” he said simply, leading inevitably to his mantra: “Keep your eye on the ball.”

*

A slick talker and sharp dresser with long, tight ties to the Republican Party, the 45-year-old Shea was the first to admit a full refund was a pipe dream. He said it in his initial interview in December with the members of the newly formed pool committee, before he was hired. It was not what they wanted to hear.

Shea, who was not planning on vying for the committee counsel post, had arrived in Santa Ana to help his original client in the bankruptcy, the Orange County Water District, secure emergency cash from the pool to make payroll.

Half a dozen other law firms came to pitch for the job with two, three, five partners. Shea was alone. The others brought glossy spiral-bound packets tailored to the county case; he had a two-page resume hastily faxed north by his secretary at the last minute.

Other attorneys banged on the table and promised a full refund. Shea told the committee to forget about the money that had been lost, and worry about what was left.

Many in the room recalled U.S. Trustee Marcy J.K. Tiffany’s last words when she had appointed them the day before: Negotiate, don’t litigate. Hire a lover, not a fighter.

That was Shea.

“He was the only one who said it. He was the only one that didn’t come in there with the false promises of getting our initial deposits back in cash,” recalled Andrew Czorny, finance director of the Orange County Water District. “It was more believable. We knew that the money was gone.”

But for a long time, they could not tell anyone else.

Before the first “all-hands” meeting for every investing agency, Oftelie whispered to Shea, “We should tell them we’re not going to get 100%.” Then the meeting began.

“It was like a blast furnace,” Oftelie recalled of the investors’ ire, aimed at the county but fired at pool committee members. “I leaned over to Shea and said, ‘We’re going to get 100% back and that’s that.’ ”

*

That left the pool committee and the county impossibly far apart.

Investors talked about the pool being a trust fund, arguing that the county couldn’t take a penny for itself until every debt was repaid. The county used a mutual fund analogy: Sour investments meant shared pain.

Shea was somewhat afraid to fight. Lawyers at his firm had researched the trust theory. It had flaws. Bennett showed him a daunting flow chart of all the things he’d have to prove to win in court.

Besides, the battle could last years, and some pool participants would go bankrupt waiting. If the trust theory failed in court, Shea might get less than the 77 cents on the dollar the county was offering up front. And the county had its own weapon: the cash.

“We both had a loaded gun, cocked, facing each other. Under those circumstances, often it’s better if nobody pulls the trigger,” Shea said. “Once you pull the trigger, it’s pulled. The bullet is out there.”

Enter the Orange County Business Council, a group of 20 local executives answering the call for negotiating help. After a daylong information session at the Irvine Marriott Jan. 20, a troika of Irvine Co. Executive Vice President Gary Hunt, developer George Argyros and Thomas C. Sutton, chief executive officer of Pacific Mutual Life, was crowned “honest brokers” to restore trust between the two sides and get the deal done.

“The first hurdle was getting beyond the issue of who was responsible,” said one negotiator who spoke on the condition he not be named. “If you focus on responsibility, then the issues would never get resolved. A lot of people don’t understand: There was $10, and they lost $4. It’s gone.”

For the next two weeks, the trio met almost daily with Shea, Oftelie, county bankruptcy attorney Bruce Bennett and then-county Treasurer Thomas W. Hayes. Former county Supervisor Bruce Nestande and longtime politicos Dan Young and Gary Hausdorfer were on hand to help.

The meetings in the ninth-floor conference room at the Irvine Co. headquarters in Newport Center started at 7:30 a.m. and typically lasted through lunch. Hayes joked that the fine coffee was a welcome relief from the county brew. There were few breaks.

“There was no room to breathe,” Nestande said. “The whole goal was to keep it moving on a factual basis and just not allow posturing. There was no posturing.”

It became clear the county could not repay investors 100% in cash. But Oftelie saw that “the county had an empty wallet, but was wearing a gold Rolex watch.”

At every session, someone stood at an easel, writing 77 cents at the top, and scratching out ideas for notes and claims to repay the rest over time. Bennett arrived most mornings with a “term sheet,” listing general concepts for a deal.

Oftelie, the pool’s largest investor, had $1.1 billion tied up. High stakes.

By Feb. 7, the business leaders could push no further. They called a press conference, unveiled Term Sheet 6, and started to wipe their hands. The Board of Supervisors signed off on the plan, but the pool committee would not.

Worried, Shea asked Kenneth Leventhol--an accountant hired by the Business Council to verify the two sides’ numbers--whether there was any hope.

“I said, ‘Kenny, does this have any chance at all?’ He said, ‘Of course it has a chance, it’s written down.’ ” Shea recalled. “When you’re just talking about things, nothing has a chance. When you start writing things down and publicizing it, you create the momentum.”

*

It took 19 days to hammer out the term sheet, but 46 to turn it into a deal.

Much of that time was spent drafting and redrafting a 60-page settlement document 20 times. A little was spent on actual negotiating, resulting in changes that gave the pool participants about $50 million more overall. Most, though, was just going around and around in circles, as people tried to persuade each other the deal was as good as they could get.

One negotiator called the process “glacial.” Another used “incremental.” A third chose “evolutionary.”

Perhaps the biggest fight came over the last 10% owed each investor. The term sheet called it a “subordinated claim,” something the county would pay back some day, if it could. Someone made the mistake of describing the claim in public as “a hope and a prayer.”

Eventually, the 10% was renamed a “repayment claim,” and the county vowed its “best efforts” to pay it off. The change was largely semantic; there were still no specifics about when, or how. But it was enough.

“It was as much a political stumbling block as a real stumbling block,” confided one key player in the negotiations.

“It’s a junk bond. It’s a junk note,” he said of the repayment claim. “But the elected officials needed to be able to say they were getting 100 cents on the dollar.”

Lawyers and accountants spent the weekend of March 17 to 19 at the Los Angeles office of Stutman, Treister & Glatt--then Bennett’s firm--dotting i’s and crossing t’s. But when the document landed on committee members’ desks, they said, the deal on paper was not the one they had discussed.

The break point came Thursday, March 23, during a committee meeting at the Orange County Water District. Shea and Bennett were sniping across the phone lines. Half a dozen players insist they remember the incident vividly, but differ on what it was about. It didn’t matter.

At the water district, Hunt picked up another phone and dialed county Sheriff Brad Gates.

“He’s highly intelligent, and kind of regal in his stature,” Czorny said of Hunt. “But he got on the other phone, and he swore like the Marine he once was.”

The next call from Bennett to Shea was friendly.

*

Since Oftelie was chosen chairman at its first meeting, the pool committee had cast ballots only once, over a minor issue. Oftelie loved consensus. The meetings were a kind of group therapy, with each member saying how he felt about everything.

The worst crisis had hit early on, when rumors flew that Oftelie might be tapped county chief executive.

“There were some hard questions asked of Stan: ‘Are you in this for us, or you?’ There was a real challenge to his leadership,” said one attorney who attended every committee meeting.

Oftelie swore he had not sought the post, vowed to turn it down if offered, a “commitment he didn’t really want to make,” according to a confidante.

Then Blake Anderson of the county Sanitation Districts--dubbed “Boy Scout Blake” for his principled stances--made each representative pledge allegiance to the committee, promising that he would not pursue private agendas.

That incident far behind them, the committee now faced its ultimate task: voting on the settlement agreement. Away at family gatherings, the two most reluctant of the seven members missed the crucial meeting Saturday evening, March 25.

Mountain View City Atty. Michael Martello, the most aggressive trust theory proponent, wanted to bring the document back to his subcommittee of cities outside Orange County before giving it the nod. Irvine City Manager Paul O. Brady worried that the deal was no better than the offer in Term Sheet 6.

“I’m still not certain I have the evidence to make this case,” he wrote in a memo to the committee. “Maybe others . . . know the evidence and it just has not sunk into my thick head.”

William C. Woollett, a former Irvine city manager and Brady’s mentor, called his friend on the committee’s behalf and persuaded Brady to support the deal. Anderson, the man who had wondered in umpteen meetings what was right , tried the same with Martello.

“I said this was probably the biggest single decision that any of us would have in our entire careers. We had to move it forward,” he remembered later. “We’d believed we could have 100% consensus in the end. That was what kept the group together.”

Martello, the outsider from the beginning, would not budge. The vote was 6 to 1.

Consensus had proven as elusive as a 100% cash pay-back, but the committee decided to press forward and go public with the deal.

At 9 a.m. today, when the first check lands in an investor’s hand, Shea will finally take his eye off the ball.