ORANGE COUNTY IN BANKRUPTCY : Trail of Money Between County, Brokers Probed : Inquiry: Officials paid millions to investment bankers, while Wall Street made political contributions. SEC, prosecutors seek links between the two.

As Orange County plunged deeper into debt, public agencies in the county paid out at least $50 million this year--and possibly up to twice that much--to investment bankers, lawyers and other consultants involved in the world of municipal finance.

And Wall Street bankers, bond lawyers and financial advisers gave tens of thousands of dollars in campaign money to supervisors, city council members and the elected trustees of obscure special districts that paid their fees.

The U.S. Securities and Exchange Commission and the Orange County district attorney’s office are investigating the possibility that campaign contributions, or even kickbacks, were provided to county officials in exchange for the county’s lucrative bond business.

Meanwhile, Orange County and its cities, schools and special districts have emerged as by far the heaviest per capita user of bond debt in California.

Altogether, Orange County and its political subdivisions sold $9.2 billion in bonds in 1993 and the first three quarters of 1994--an amount about equal to the bond debt issued by New York City, and exceeded in California only by state government and Los Angeles County.

In 1993, Orange County governments sold $4.9 billion in bonds. That works out to $1,887 in bond debt for each man, woman and child in the county. Contra Costa County was a distant second with $1,381 in bond debt per capita, according to a Times analysis of statistics compiled by the California Debt Advisory Commission.

“We’ve simply responded to what’s happening all around us,” Supervisor Thomas F. Riley said, explaining that Orange County’s status as a haven of bond sales was driven by the need to accommodate population growth. “We’ve got growth with 55,000 births a year, and certainly business and industry have continued to expand.”

In testimony before a government oversight commission, Assemblyman Phillip Isenberg (D-Sacramento) charged that officials resort to such financing because “politicians fear the consequences of attempting to live within their means.”

“This fear is bipartisan,” Isenberg said. “It includes the governor, the Legislature and, of course, the Board of Supervisors and chief administrative officer of Orange County.”

Most of the money raised by the bond sales was earmarked for traditional government undertakings, such as building schools and roads.

But in some instances, Orange County--led by then-Treasurer-Tax Collector Robert L. Citron--sold bonds to generate money to invest in speculative Wall Street securities. By investing in those securities, Orange County generated interest income, helping officials avoid imposing higher taxes or cutting popular government services.

After those fixed-rate securities plummeted in value with this year’s interest rate increases, the county filed for bankruptcy Dec. 6.

The pace of borrowing had accelerated in 1994. In the first nine months of 1994, Orange County and its political subdivisions arranged for more than 100 separate bond sales totaling $4.3 billion.

With each sale, bond brokers from Wall Street to Newport Beach took their cuts. Investment banking firms such as Merrill Lynch, Bear Sterns and others reported receiving more than $20 million in underwriting fees for marketing the bonds, a review of official statements filed with the Debt Advisory Board shows.

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Many of the official statements, which resemble the prospectuses issued with commercial stock offerings, omit details about the fees. But based on what information is available, lawyers hired by the government agencies issuing bonds reported being paid $1.5 million. Firms that insured some bonds, financial advisers and others involved in the bond sales received at least another $22 million.

One major beneficiary this year was the investment banking firm Lehman Bros., which reported receiving more than $6 million in underwriting fees on $560 million in bonds. PaineWebber reported collecting $2.5 million in fees. Smith Barney Shearson reported $1.1 million.

The New York-based Public Securities Assn. estimates that underwriters’ fees average $7 for every $1,000 in bonds, or $700,000 on a $100-million bond issue. Using that estimate, Orange County’s sale of $9.2 billion in bonds since the beginning of 1993 would have generated $64.4 million in underwriting fees for investment banking firms.

But Zane Mann, publisher of the California Municipal Bond Adviser, said fees for underwriters and others involved in putting together deals often amount to 3%, or $3 million on a $100-million issue.

If Mann’s figure is accurate, the underwriters, lawyers and financial advisers involved in Orange County bond sales were paid more than $275 million over the last two years.

“Everybody is getting a piece of the action these days,” Mann said, referring to bond attorneys, financial consultants and firms that print the documents describing the bond issues.

Law firms involved in many Orange County sales--such as LeBoeuf, Lamb, Green & MacRae--generally do not specify their fees. But one law firm, Stradling, Yocca, Carlson & Rauth, reported receiving $650,000 for handling more than half a dozen bond issues in Orange County.

In the high-flying days before the bankruptcy, the underwriting fees were only a fraction of what the brokerages made from Orange County securities deals. Wall Street firms also made money by selling securities to the county, with the county sometimes raising money to purchase the securities by issuing bonds through the same brokerage houses.

“That’s called, ‘getting paid on both sides.’ It’s a salesman’s dream,” said a money manager for a firm that does business with the state.

A sampling of transactions shows that Merrill Lynch, the Wall Street firm most closely linked to the Orange County financial debacle, took $1.8 million in fees by serving as the underwriter on $600 million in notes issued last summer by the Student Loan Marketing Assn., or Sallie Mae.

Shortly after the Sallie Mae notes were issued, Merrill Lynch sold $600 million worth of Sallie Maes to Orange County, apparently taking a commission on the sale, because the county paid $3.8 million more than face value in the deal.

Several weeks earlier, Merrill Lynch also arranged for the county to raise $600 million in cash--the same amount it needed to buy the Sallie Maes--by underwriting a $600-million offering of county notes, for which the county paid Merrill Lynch $780,000 in underwriting fees.

“(Underwriters’) revenues can be multiplied by doing a series of extra deals with the same client, and sometimes with the same funds,” said Robert B. Lamb, a professor at New York University and debt adviser to municipalities, including New York City.

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Exactly how much money Merrill Lynch has made from Orange County over the years is not available. Merrill Lynch spokesmen refuse to discuss the firm’s fees. But because Merrill Lynch handled so much of the county’s business, relations between the Wall Street firm and some of its brokers on one side and county officials on the other have become the prime focus of at least two criminal investigations.

Denizens of municipal finance are notorious for being a highly competitive bunch. One investment banker, describing the cutthroat nature of the business, recalled a line attributed to Wall Street takeover artist Carl Icahn: If you want a friend on Wall Street, get a dog. “Well,” said the banker, “in public finance, we shoot each others’ dogs.”

In Orange County, Wall Street bankers would seek to gain an edge by hiring local lobbyists, and by handing out political campaign contributions.

Investment bankers’ political donations ranged from as high as $5,000 to as little as $70. From its Manhattan office, Merrill Lynch reached out beyond the Board of Supervisors, where most of its money went, to smaller agencies such as the Irvine Ranch Water District, giving $99 checks to candidates for the board, where low-key campaigns cost a few thousand dollars.

“They have made a token contribution as a manner of business etiquette,” said John Withers of the Irvine Ranch Water District, one of those who received a check for $99.

Although Withers said he has never spoken to a Merrill Lynch banker, he noted that the firm “has done a significant amount of business with the district and I suppose they want to show support.”

Merrill Lynch and its employees gave $15,000 from 1991 to 1993 to local officials in Orange County, making it the most generous contributor to local officials in the county among investment firms during that period, campaign finance reports show.

Jim Wiggins, director of corporate communications at Merrill Lynch, said the donations were “legal, proper and appropriate in every way,” adding that the money “had nothing to do with any quid pro quo.”

“Merrill was certainly not the only municipal securities firm that was asked to contribute, and that made contributions. It was just the way it worked,” Wiggins said. “We were seen by political candidates as a source of funding for political campaigns.”

Merrill Lynch stopped giving corporate donations to politicians last year, and the Securities and Exchange Commission issued a ruling this year barring contributions by brokerage houses to elected officials who are in a position to award bond contracts.

The rule was aimed at stopping what came to be viewed as a “pay to play” system in which bond firms donated to political officials who gave them bond business.

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In California, state treasurers were the biggest recipients of Wall Street donations, receiving tens of thousands of dollars from individual firms for their campaigns. At the local level, donations in Orange County rivaled what bankers gave to officials in Los Angeles, Santa Clara, Alameda and San Francisco counties.

In Orange County, the official who received the most campaign money from firms and individuals in the bond business appears to have been Supervisor Roger R. Stanton. Stanton, who did not return calls seeking comment, received $14,500 since 1991 from Wall Street firms and their employees, and bond attorneys.

In Anaheim, council members and candidates received more than $22,000 since 1991 from Wall Street brokerages, law firms specializing in securities issues and their employees. Mayor Tom Daley received more than $13,000. In Santa aAna, various players in bond deals have given more than $4,000 to Councilman Robert Richardson. They also donated at least $10,500 to a measure put before voters to use bond proceeds to build a jail in Santa Ana.

Investment bankers who are familiar with Orange County say supervisors sometimes took a direct hand in selecting the underwriters, interviewing them in their chambers about the deals they were offering.

Supervisor William G. Steiner acknowledged that supervisors sometimes were involved in the selection when deals directly affected their districts, but said he never participated in such a process.

Steiner, who received $7,600 from bond merchants, downplayed connections between contributions and the underwriters who received business, saying he knew some investment bankers who gave to his campaigns before he joined the board.

“I think there was so much business in Orange County that no one had the exclusive purview (over who was) to be selected or not selected,” he said.

Times staff writers Mark Landsbaum and iDebora Vrana contributed to this story.