County wins legal battle over Lehman

A dozen San Mateo County school districts do not have the authority to sue the county and its former treasurer for a collective $20 million loss caused when the Lehman Brothers bankruptcy leeched at least five times that amount from the county investment pool, according to a San Francisco Superior Court judge.

Judge Richard Kramer on Thursday affirmed an earlier tentative ruling that San Mateo County and former treasurer-tax collector Lee Buffington are immune from civil suits. The ruling essentially dismisses the case but the districts plan to appeal.

Even so, Michael Celio, attorney for the county and Buffington, said Kramer’s ruling is a victory.

"We are very pleased with this development and that this is over in one form,” Celio said. "This is one large step.”

County officials are deferring any comment on the ruling to Celio, said spokesman Marshall Wilson.

Farley Neuman, attorney for the districts, said he respectfully disagrees with the ruling and is optimistic the districts will prevail on the appellate level.

"We don’t think this is consistent with case law. I don’t think it makes any sense,” Neuman said. "And on top of this they were getting paid to collect and manage this money they lost.”

Celio said an appeal was always expected and the dismissal saves time and money because a trial is not first needed on the merits. Instead, the case heads straight to the higher court for a decision on the standing. If Neuman prevails, the case will return to San Francisco Superior Court for trial.

"It is definitely an advantage,” Celio said. "We’re pleased that our legal theories were right and we’re happy to move on.”

In January, the districts and the superintendent of county schools sued the county and Buffington for $20 million plus interest. The suit argued the county and Buffington should have pulled investment pool funds prior to the Sept. 15, 2008 collapse of Lehman Brothers. The pool lost approximately $155 million from its collection of cities, agencies and districts.

The county has 24 public school districts of which 12 are named in the claim along with the San Mateo County Superintendent of Schools: the San Mateo Union High School District, Menlo Park City Elementary School District, Belmont-Redwood Shores Elementary School District, Cabrillo Unified School District, Burlingame Elementary School District, Ravenswood City Elementary School District, San Bruno Park Elementary School District, San Carlos Elementary School District, Las Lomitas Elementary School District, Portola Valley Elementary School District and Woodside Elementary School District.

The San Mateo County Community College District also lost an estimated $25 million itself but did not join the suit.

In June, Kramer ruled that state law protected the county from being sued for negligence and breach of fiduciary duty. Kramer also said the suit wasn’t brought in a timely manner and wasn’t specific enough about how the county allegedly breached its contract.

In an amended complaint, Neuman claimed any filing delay was because Chief Deputy County Counsel Brenda Carlson worried public notice of a suit would destroy the county’s chances of a federal bailout. In his Thursday ruling, Kramer agreed with Neuman’s argument and rejected the county’s request for a dismissal based on the timing.

The battle now is whether Buffington and the county should be held responsible for the investment pool loss.

In the original lawsuit, Neuman said the county and Buffington engaged in a "high-stakes gamble” by remaining invested even as Lehman lost value. Doing so, plus not diversifying the pool’s holdings, violated the county’s own policies and state law, according to the suit.

The pool is a collection of 1,050 different accounts from cities, school districts and special agencies, some of which are obligated to invest. Following the bankruptcy, the county rewrote its investment pool policy, a new treasurer-tax collector was elected and lawsuits were lodged by the county against the firm and its executives and accountants.

While the county was seeking to recoup the losses, it was also spending money on its defense against the schools’ suit. Between Oct. 5, 2010 and June 30, 2011, the county has paid $615,492.70 for specialized litigation to the San Francisco-based law firm Keker and Van Nest, according to information provided by Wilson, the county spokesman.

Updated numbers were not immediately available.

Neither Neuman nor Celio had a timeline for when the case could be heard in the appellate court but Celio said he was certain it would not be before the end of the year.

Michelle Durand can be reached by email: michelle@smdailyjournal.com or by phone: (650) 344-5200 ext. 102.