Popejoy and Merrill Chief Discuss Suit
Orange County’s top executive flew to New York last week and secretly met with the chairman of Merrill Lynch & Co. to discuss a possible settlement of the county’s $2.4-billion lawsuit against the firm the county blames for its bankruptcy, sources disclosed Tuesday.
Chief Executive Officer William J. Popejoy, who had been scheduled to meet with legislators in Sacramento at the time and was fighting the flu, instead went to New York on Tuesday so he could meet face-to-face with Merrill Lynch Chairman and Chief Executive Officer Daniel P. Tully at the firm’s corporate offices Wednesday morning.
Both county and Merrill Lynch officials declined to discuss the meeting or what, if any, progress was made toward settling the county’s legal action against the firm.
The meeting signaled a breakthrough in the standoff between county and Merrill Lynch officials, who have repeatedly blamed each other for the largest municipal bankruptcy in U.S. history. Most of the securities on which Orange County lost nearly $1.7 billion had been offered to the county by Merrill Lynch.
Sources familiar with the situation cautioned against reading too much into the meeting and said that both parties were still very far apart on a possible settlement deal.
“This is a very delicate situation,” said one source close to the negotiations.
It was unclear Tuesday whether the county or Merrill Lynch initiated the meeting, but one source said it was the county’s idea.
Paul S. Nussbaum, a top adviser to Popejoy, declined to discuss the meeting and said Popejoy wouldn’t talk either. Attorney James W. Mercer, who represents the county in its lawsuit against Merrill Lynch, also declined to comment.
Merrill Lynch spokesman Timothy Gilles said Tuesday evening, “We will have no comment.”
Orange County filed for bankruptcy Dec. 6 after suffering trading losses of $1.69 billion in its investment pool.
On Jan. 12, the county sued Merrill Lynch for $2.4 billion, blaming the giant brokerage firm for perpetrating a “massive investment scheme” that involved “the illegal extension of billions in credit” to former county Treasurer-Tax Collector Robert L. Citron so that he could “buy exotic debt obligations” that ultimately caused the collapse of a county-run investment pool.
At one point, the county had roughly $14 billion in borrowed money invested in securities whose values plummeted as interest rates increased last year.
Merrill Lynch’s willingness to lend money to Citron, to sell him risky securities and to participate in the sale of hundreds of millions of dollars of county bonds issued solely to leverage greater investments figured prominently in the collapse of the investment pool and the county’s subsequent decision to declare bankruptcy.
Among other things, the county contends that Merrill Lynch “permitted and encouraged” Citron to make investments that the firm knew violated California law and “were contrary to the county’s investment objectives of safety and liquidity, and preservation of capital.”
The suit also contends that the brokerage firm “wantonly and callously abused the trust and confidence” of the county by allowing Citron to invest public funds in volatile and risky securities.
Merrill Lynch denies it misled Citron. Its executives have testified publicly that the brokerage firm felt Citron was a sophisticated investor who understood the complexities of municipal finance.
In January, the firm publicly released letters it had sent to Citron offering to buy back the entire portfolio of exotic securities. But the offers were spurned by the former treasurer. And last week, Merrill Lynch gave a special California Senate committee investigating the bankruptcy internal memos showing that some of the firm’s executives were concerned as early 1992 about Citron’s dangerous investment strategy.
The likelihood of collecting damages from Merrill Lynch played a key role in the county’s negotiations with the schools, cities and other pool investors who agreed in a bankruptcy court settlement adopted May 2 to accept IOUs backed in part by expected lawsuit proceeds.
In an interview with The Times last month, Popejoy boasted about the strength of the county’s case against Merrill Lynch, pointing to press accounts describing struggles within the company about its dealings with Orange County and Citron.
News accounts portrayed an investment giant at war with itself over its involvement with Orange County nearly three years before the county declared bankruptcy.
“I think we’ve made a lot of progress in the Merrill Lynch litigation and I think evidence of that are the articles . . . on Merrill Lynch’s behavior and their involvement with Mr. Citron,” Popejoy said in April.
“Merrill Lynch and others, if they haven’t before, are going to understand better that this is a very serious problem for them. . . . We have a very strong case,” Popejoy said.
From its published financial statements, Merrill Lynch might well be able to afford a large settlement. It is an enormous company that earned more than $1 billion last year on revenue of $18.2 billion.
* BILL AIDING SCHOOLS SIGNED: O.C.’s districts permitted to borrow against real estate. A16
* BOND ROLLOVER CHALLENGE: Pool investors say repayment delay violates agreement. A17
* SHORT-TERM NOTES: State’s counties, schools will soon discover how costly Orange County’s debacle is. D1
