ORANGE COUNTY IN BANKRUPTCY : Judge Orders Merrill Lynch Not to Sell County Assets : Courts: The edict will stand until a hearing next week. It follows reports--denied by the brokerage--that $800 million in securities were sold Thursday.

TIMES STAFF WRITER

At an emergency, after-hours hearing Thursday night, a federal judge ordered Merrill Lynch & Co. not to dispose of any county assets held by the firm until he can decide what should be done with them at a hearing next Tuesday.

Alarmed by wire service reports that Merrill Lynch on Thursday had sold $800 million worth of securities the brokerage held as collateral for loans it had extended to the county, attorneys for the county persuaded federal court officials to remain open nearly three hours beyond their normal closing time for an emergency hearing on a county motion.

The county asked U.S. Bankruptcy Court Judge John Ryan to issue a temporary restraining order to prevent the firm from selling any of the county assets it held as collateral, to keep the firm from commingling any sale proceeds in other Merrill accounts, and to deposit any moneys earned through such sales into a trust fund to be held by the court clerk.

The county's attorneys accused Merrill Lynch, the nation's biggest securities firm, of trying to beat the county to the punch and preempt the court's ability to control disposition of the assets.

The county was originally scheduled to ask the judge to freeze the assets Merrill was holding as collateral at a hearing set for this morning.

But after getting wind of possible sales, county attorneys said they were afraid the firm might also try to disperse or commingle the funds from the sales in U. S. or foreign markets before this morning's scheduled hearing, making them untraceable and uncollectible.

"We are certainly suspicious that the assets were sold today, and certainly concerned about further surprise liquidations," said county attorney J. Michael Hennigan. "We had believed and hoped to build a fence around $1 billion that rightfully belongs to the county. Now we're told it's gone," he said.

But Merrill Lynch attorneys denied this, claiming the sale reports were erroneous or that Hennigan had misunderstood them. They said the firm had sold only what the county had ordered it to sell since the county declared bankruptcy on Dec. 6.

"The county has a misunderstanding which we will straighten out," said Merrill Lynch attorney Stephen English. "We don't even think that the hearing tonight was necessary."

The attorneys also complained that they had received only an hour's notice of Thursday night's hearing and argued that it would be unfair to the firm for Ryan to make a ruling on the restraining order without giving Merrill Lynch more time to prepare a defense.

Ryan agreed to put off a decision until a hearing he scheduled for Tuesday with the stipulation that the firm do nothing with the county's assets until then.

The firm's attorneys told the court that Merrill Lynch had been in the process of selling only $232 million worth of county assets--and only on orders from the county. Some $47 million was to be deposited in the county's account at Merrill Lynch today and another $184 million, which the firm said it brought in on Thursday, was to be deposited in the county's account next Wednesday.

In all, the firm's attorneys said the firm has only $254 million in county assets, not the $1 billion amount the county had believed.

What exactly happened to the remaining $800 million in county collateral was not clear from Thursday night's hearing--even to the firm's attorneys.

"I haven't even had time to read through the motions," English said. "This is a highly technical matter. We will be delighted to try to explain it later."

According to county attorney Bruce Bennett, however, Merrill Lynch informed the county that it sold the $800 in securities at the beginning of 1994. Those sales were without the county's knowledge or permission, Bennett said.

A separate suit the county filed against the firm Thursday seeks to collect more than $2 billion in damages from the firm. It alleges Merrill Lynch violated state laws by making massive extensions of credit to the county and encouraging it in risky investments.

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