NEWS ANALYSIS : Anatomy of a Plea Agreement : Courts: O.C. officials say Citron’s cooperation helps their case against Merrill Lynch. Brokerage calls that ‘absurd’ and could tar him as an admitted liar.

Does former Orange County Treasurer-Tax Collector Robert L. Citron’s startling admission of guilt this week position him for his next role--as star witness against Merrill Lynch & Co.? Or does it tar him as an admitted liar who will be shredded on the witness stand by the Wall Street giant?

Citron, who Thursday pleaded guilty to six felony charges that he lied to bond investors and misappropriated public funds, is cooperating with investigators in hopes of minimizing his punishment. That leads many legal experts to believe that he will play a critical part as the county pursues its $2.4-billion lawsuit against Merrill, which sold the now-bankrupt county many risky securities and underwrote some of its now-suspect bonds.

Merrill officials Friday would not comment on the guilty plea. But in a release they called arguments that Citron’s guilty plea will help the county’s case “absurd,” adding that county officials “are using this in an attempt to try their legal claims against Merrill Lynch in the press.”

While all involved spent the day handicapping the importance of the felony pleas, observers said that Citron’s brief courtroom appearance left many unanswered questions: What does Citron know? What will he tell investigators about Merrill Lynch and its super salesman, Michael Stamenson? And what will Citron say about the possible criminal involvement by his former assistant, Matthew Raabe, and other county officials?

The break in the criminal investigation also leaves volumes unknown about the incredibly complex financial fiasco stemming from Citron’s reign and fall. Cash-poor investors in the county’s ill-fated bond pool will be back in Bankruptcy Court on Tuesday; voters must decide on a half-cent sales tax increase June 27; and the county is still short the $1.2 billion it needs to pay bondholders this summer.

Citron’s pleas were “a sideshow that would have happened, everyone knew that,” said Hugo Quackenbush, a vice president for Charles Schwab in San Francisco which through its mutual funds owns part of the $600-million note issue sold by the county last summer.

“The real issue,” he said, “is the vacuum of leadership in Orange County, which has got a skimpy (bankruptcy recovery) plan. Everyone’s still very concerned about whether (county leaders) understand the importance of the moral issue” of paying its debt.

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Nonetheless, optimistic county officials Friday hailed Citron’s guilty pleas as a boon for their recovery plans, which hinge on winning a lawsuit against Merrill Lynch, the nation’s biggest brokerage firm. Officials argue that if Citron violated laws because of what he knew, Merrill must have known of the funds problems and violated laws as well, allegations that Merrill denies.

County lawyer Lee Bogdanoff called Citron’s plea “encouraging” for the county’s case against the investment giant.

“We’ve said all along that Merrill Lynch is responsible for egregious activities that it committed,” Bogdanoff said. “The county’s position is that (Citron) couldn’t have acted in a vacuum. When you get down to brass tacks, this means Citron is going to pay in time and Merrill Lynch is undoubtedly going to pay the citizens of Orange County.”

On the other hand, some lawyers and bond specialists said Citron’s guilty pleas are a boon to Merrill because even if new charges are made against the nation’s largest brokerage firm, Merrill will try to paint Citron as an admitted liar.

“I think it greatly weakens the county’s case against Merrill because they are going to have to rely on him, and he’s said he’s a liar,” said Zane M. Mann, publisher of the California Municipal Bond Newsletter in Palm Springs.

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In addition to pool participants, bondholders also have an interest in Citron’s guilty pleas--it could strengthen their chances of successfully suing the county since Citron admitted he lied to them.

“These plaintiffs suing the county will have big smiles on their faces now,” said Samuel Gruenbaum, a securities lawyer in Los Angeles. “The guy who was at the centerpiece of all this--he knew. And now everyone involved will be asked if they knew too.”

The case could not only open up bondholder suits against the county, but against other investment banking firms, lawyers and financial advisers who did business with the county.

“If you have the person who was at the epicenter of this--if he says ‘I knew we were lying about the pool’ to participants and bond investors--it could make it more difficult for others to say ‘I didn’t know,’ ” said Gruenbaum.

Because Citron’s guilty pleas strengthen the legal arguments of bondholders, it increases the need for the county to make good on $1.2 billion of bond debt that comes due this summer. If the county doesn’t pay its debt, it may eventually pay bondholders in court.

“If the county doesn’t pay its bond debts, there is going to be an additional rash of lawsuits by investors,” said James Spiotto, bankruptcy attorney in Chicago. “If they don’t make good on their debts, these bondholders may have a pretty good case.”

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Patrick C. Shea, who represents pool investors, predicted that the guilty plea would not affect a Tuesday hearing when U.S. Bankruptcy Judge John E. Ryan reviews a settlement plan for the ill-fated bond pool. The settlement largely resolves claims against the county by pool investors, Shea said that Citron’s plea wouldn’t have surprised pool investors who earlier learned through periodic reports from the county and investors’ own accounting experts about improper funds transfers made by Citron.

“Much of the investigation done by the Orange County Grand Jury was conducted through pool participants,” Shea said. “None of this is going to be a big surprise to anyone. . . . I’ve gotten no calls from anybody requesting to change their position. That’s because the nature of the criminal counts to which Citron pleaded interrelate with the financial irregularities we already know about.”

The county doesn’t expect investors to withdraw from the settlement plan, Bogdanoff said, because Citron’s pleas didn’t generate information about additional improprieties involving funds in the bankrupt bond pool.

“The things Citron confessed had their nexus in disclosures that the county made a long time ago,” Bogdanoff said.