Suit's Dividend May Be in Shifting Blame


Even if it wins its suit against Merrill Lynch & Co., finance and legal experts say Orange County has little hope of recouping the $2.02 billion it lost on Wall Street securities, but may succeed in shifting blame from county officials as it points a finger at the only party with deep pockets.

The federal lawsuit argues that Merrill Lynch is responsible for the county's losses because its representatives were aware--or should have been aware--that former Orange County Treasurer-Tax Collector Robert L. Citron was violating the state Constitution and government codes when he borrowed millions and gambled taxpayers' money on risky investment schemes.

But the same argument could be used--and used effectively--in Merrill Lynch's defense, finance and legal experts said Thursday.

"Any time someone says, 'you knew,' or 'you should have known,' you can then turn around and go through the gamut of people who also touched it and say 'they should have known too,' " said Chicago attorney James Spiotto, a specialist in Chapter 9 bankruptcy issues.

As if on cue, Merrill Lynch released a statement Thursday echoing that line, denouncing the suit's allegations as an attempt to make the giant Wall Street brokerage a scapegoat for the county's mistakes, and stating that there is overwhelming evidence that the Orange County Board of Supervisors was aware of Citron's risky investment strategy and its potential pitfalls.

"For the Board of Supervisors to now accuse Merrill Lynch is disingenuous at best, and an abdication of their own responsibilities in this matter," the statement read. "For years they reaped high rewards. Now they want to deny the risks. In effect, they're saying: 'Heads we win, tails you lose.' "

Jennifer Arlen, who teaches securities law at USC, said parts of the county's suit appear to have merit. If Citron were investing his own money and was personally made aware of the risks involved, Merrill Lynch would have fulfilled its obligation, Arlen said.

"The question here is whether informing Citron is sufficient," she said after reviewing the suit. "Arguably, they had a duty to go over his head, go straight to the Board of Supervisor's and say, 'Hey, there is a problem here.' It seems the county has potentially a good claim here."

But county's charge of securities fraud is less clear, she said.

"You need to have misleading information or evidence of deceit," Arlen said. "They will have to prove . . . non-public information . . . was somehow withheld from them, when presumably the county could find out what they were doing with the investments at any time."

One thing seems clear: Orange County could face years of complex litigation and staggering legal bills and out-of-pocket expenses. And even if successful, it is unlikely that the county will recoup all its losses.

For example, San Jose sued Merrill Lynch and other brokerage firms in the mid-1980s after losing $60 million in securities trading. The lawsuit charged, among other things, that Merrill Lynch did not follow county guidelines for investing--a charge similar to Orange County's.

Merrill Lynch paid $750,000 to settle its portion of the suit, said New York attorney Patricia M. Hynes, who represented the city.

"No, we didn't get it all back. But I certainly think it was worth it for the city of San Jose to try," she said. Hynes said she could not comment on Orange County's suit, but said she sympathized with their position.

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