A Clear Need for Some Sunshine : Brokerage in O.C. crisis should disclose all
One of the central questions surrounding Orange County’s bankruptcy is the relationship between then-Treasurer-Tax Collector Robert L. Citron and Merrill Lynch & Co. Did the brokerage firm abuse the county’s trust by leading Citron into risky investing? Or was Citron a sophisticated investor, fully aware of what he was doing and where he was going?
At the heart of all this is a matter of real importance to municipal investment pools everywhere. It’s the responsibility of those peddling risky financial instruments like derivatives to refrain from putting public entities unnecessarily at peril as the firms try to maximize their own profits. In Los Angeles, a brokerage’s relationships with municipalities are under a different sort of scrutiny: Smith Barney Inc. has hired an outside law firm to investigate allegations that it deceived Los Angeles County in 1993 by secretly taking a $1.3-million fee.
While the issues in the Orange County case await sorting out, it has become clear in recent days that Merrill has not been entirely candid. The firm’s release of documents has been selective, and it is now obvious that salesman Michael G. Stamenson’s testimony before a special state Senate committee in January about a $600-million bond deal for Orange County in 1994 is contradicted by other evidence.
The bottom line is that if Merrill Lynch wants the public and government in Orange County and elsewhere to have confidence in its investment practices, it now should release all appropriate documents about its own internal discussions.
Stamenson testified he was just a securities salesman with no role in bond issues. Merrill Lynch now acknowledges that higher-ups told Stamenson to call Citron and tell him that the firm could do better on the enormous bond deal than Paine-Webber, which earlier was handling the transaction. Merrill Lynch says it did nothing wrong. However, there are questions, including whether securities law was violated because Stamenson had made a campaign contribution to Citron.
Then there are new reports of a fierce in-house battle at Merrill Lynch going back as far as 1992 over risks and profits in the firm’s dealings with Orange County. The company says its documents and statistics were misrepresented in a Wall Street Journal report this week. But in refusing to release all the documents in this case, the firm leaves questions open about just how forthcoming it has been.
As a practical matter, these documents are likely to come out in the course of litigation anyway. So why not release them now and clear up at least some of the confusion about the relationship between the county and the firm?
