By KENNETH OFGANG
Staff Writer

A potential settlement of a fraud lawsuit against Citrus Municipal Court Judge Patrick Murphy has fallen apart while a federal grand jury probes related allegations, a lawyer for another defendant in the suit said.

Murphy and his sister Barbara Parsons, who is also being sued in federal district court in Los Angeles, have offered to pay up to $200,000 to two securities firms to settle allegations that they misappropriated or concealed funds that were improperly removed from brokerage accounts by a friend of the judge, Agoura lawyer Gerry DeSimone told the MetNews Friday.

But DeSimone, who represents Encino lawyer Paul Ottosi, said the offer was made conditional on a promise by the United States Attorney's Office that it will not prosecute Murphy or Parsons in connection with the allegations. DeSimone called the proposal "incredible" and said it was unlikely to be accepted.

Murphy's lawyer, Thomas Dovidio of Diamond Bar, did not return MetNews phone calls, but is reported to have recently told lawyers for the other parties that his client is out of the country and seeking disability retirement from the bench. Murphy has been gone from the court for most of the past 19 months, and nearly all of the past nine months, with what his lawyer has claimed are cardiac- and stress-related problems.

Murphy has consistently denied wrongdoing, saying he is being used as a scapegoat by some of the others who are being sued. Ottosi, who said he has been cooperating with authorities since the allegations first surfaced, has said he was unwittingly brought into the matter by Murphy.

The judge, Ottosi claims, arranged to have more than $1.7 million delivered to Ottosi that Murphy said belonged to him and his wife, attorney Susan Sweetman-Murphy, and asked Ottosi to hold it in his attorney trust account before instructing him to pay it to someone else.

DeSimone predicted the judge will be charged with a felony.

"I like the odds of an indictment better than anything I've bet on in my life," DeSimone said. In 16 years of trial practice, he added, "I have never seen a case where there is so much evidence against one person."

Smith Barney Inc. and Prudential Securities, Inc. are suing Murphy, Parsons, Ottosi, Dr. George Taus, and others for more than $800,000, including interest. The firms claim that Murphy helped Taus, a close friend, conceal from the doctor's ex-wife, Susan Taus, a portion of the funds to which she was entitled as a result of a marital settlement agreement.

The firms are suing because a National Association of Securities Dealers arbitration panel held them responsible for improperly paying the funds over to the doctor and required them to reimburse Susan Taus. Murphy, Taus, and others are also being sued by a bankruptcy trustee acting on behalf of Taus' creditors.

Federal authorities have declined all comment on the case. But sources said the FBI has been investigating for months, and at least one defendant in the civil case has testified before the grand jury.

Grand jury proceedings are officially secret. But the probe came to light last month when a lawyer for Taus, Jeffrey Karpel of Sherman Oaks, filed a motion invoking the Fifth Amendment and asking that his client--who gave two days of sworn testimony at a deposition in October--not be compelled to testify further because he might incriminate himself.

Karpel disclosed in his declaration that a friend of Taus who is also a defendant in the Smith Barney action, Arnold Secord, testified before the grand jury before Christmas.

Karpel could not be reached yesterday for comment, and Secord's lawyer, Robert Mobasseri of Los Angeles, said he could not discuss his client's testimony with the MetNews.

Taus has now been called upon to give sworn testimony about the money on three different occasions--once in connection with his divorce from Susan Taus, once in connection with his filing for bankruptcy, and finally in the Smith Barney lawsuit.

He said that after removing the funds from the brokerage accounts--a final court order requiring that the funds be shared with Susan Taus had not yet been signed at that point--he invested the money in Copex, Inc., a startup business run by Secord. Bank records show that about $1.7 million, virtually all of Copex's funds, were transferred from Copex to Ottosi.

Ottosi reiterated Friday he understood the money to be Murphy's, according to their previous discussions, and that he later gave it, on the judge's instructions, to Maryanne Baumgarten, a friend of the judge who once worked for Murphy while he was in law practice. Various parties have asserted, in court filings and interviews, that Baumgarten transferred the money to several other people.

Ottosi said he was told by Murphy to pay it to Baumgarten under the guise of a settlement of a sexual harassment claim against Copex. Taus testified that he approved Secord's transfer of the funds because he was concerned about the sexual harassment claim.

Without a firm commitment by Murphy and Parsons to join the settlement of the Smith Barney action, DeSimone said he spent 12 hours Thursday unsuccessfully trying to put together a settlement that would cover six defendants--Ottosi, Taus, Baumgarten, Secord, plus Winnie Eisen and Essam Seif, two of the people who allegedly received funds from Baumgarten.

Eisen is Baumgarten's sister. Seif is a Tustin resident whose relationship to the other defendants is unclear.

Baumgarten and Seif, who are representing themselves, did not return MetNews calls, nor did Fullerton lawyer Ralph Evans, who represents Eisen. Ottosi has acknowledged that the money was handled in an irregular manner. But he trusted Murphy, he said, in view of the judge's position and their friendship at the time.

Murphy testified in a deposition that the sexual harassment claim was concocted by Ottosi and Baumgarten, and that he told Ottosi to give the money back to Taus. Ottosi says the judge is lying.