O.C. Refiles Suit Against Brokerage : Courts: More detailed complaint bolsters county’s $2-billion claim that Merrill Lynch falsehoods triggered pool’s bankruptcy.
Orange County refiled its $2-billion lawsuit against Merrill Lynch & Co. on Tuesday, once again blaming the giant Wall Street firm for causing the county’s bankruptcy and elaborating on an investment scheme that cheated the county and concealed the firm’s lucrative commissions.
The 59-page complaint, filed in U.S. Bankruptcy Court, provides more detail to bolster the county’s central allegation: that Merrill Lynch unlawfully extended billions of dollars in credit to then-Treasurer-Tax Collector Robert L. Citron so he could invest in interest-rate-sensitive securities that cost the county nearly $1.7 billion when his bets on the direction of interest rates proved dead wrong.
“Merrill Lynch engaged in a lengthy series of illegal, unauthorized transactions with the county involving billions of dollars in transactions that the county could not enter into,” said Michael Swartz, an attorney with Hennigan, Mercer & Bennett, the county’s lawyers.
Merrill Lynch has vigorously denied the county’s lawsuit allegations, arguing that Citron was a knowledgeable investor who was solely responsible for the county’s investment strategy. “Today’s court filing is one more example of Orange County officials failing to take responsibility for their own actions. Once again, they are trying to shift blame for the county’s financial problems to Merrill Lynch,” said company spokesman Timothy Gilles.
The county characterizes Merrill Lynch’s dealings as “. . . an overall scheme to defraud the county,” one designed “to conceal Merrill Lynch’s massive conflicts of interest and divided loyalties in connection with structuring and selling exotic derivative securities” to the county.
In one case, the lawsuit alleges, Merrill Lynch hoodwinked Citron into believing that the firm still held $800 million in securities that had been pledged as collateral for a loan, when in fact the securities had been promptly sold for $900 million in violation of the law and Merrill Lynch’s contract with the county.
In making these deals, Merrill Lynch failed to tell the county “that the securities could be sold back to the issuer at a substantial premium.”
To make Citron believe that the firm was still holding the securities, it periodically sent Citron what it said was interest earned by the securities--but which, in fact, was Merrill Lynch’s own money.
“In the year prior to the county’s [bankruptcy], Merrill Lynch repeatedly, falsely confirmed to the county’s auditors that Merrill Lynch still held the . . . securities,” the lawsuit states.
The amended complaint follows an April 27 ruling by U.S. Bankruptcy Judge John E. Ryan that six of seven claims in the county’s original lawsuit against Merrill Lynch should be heard in federal District Court instead of Bankruptcy Court.
In Tuesday’s amended complaint, the county is arguing to keep what remains of its original suit in Bankruptcy Court. Merrill Lynch has until July 6 to file a response to the county’s latest complaint.
“We think it’s a case that’s properly adjudicated in Bankruptcy Court,” county bankruptcy attorney Bruce Bennett said. “It’s part of the bankruptcy case, it belongs in Bankruptcy Court.”
Swartz said it makes little difference to the county where the case is heard, but because of the pending bankruptcy it is convenient to continue the action in Ryan’s court.
In arguing for keeping the case before Ryan, the county claims that “two high-ranking Merrill Lynch officials” sent the county and its investment adviser, Salomon Bros., a letter nine days after the Dec. 6, bankruptcy filing, notifying the county it owed Merrill more than $1.6 billion for certain transactions.
Merrill told the county that to satisfy that debt, it planned to keep the proceeds of the sale of collateral the county had pledged against loans. By Jan. 12, the county alleges, Merrill had sold off more than $1.4 billion in securities and was about to close on another $250 million.
The county claims that Merrill should have turned the proceeds over to the county, and then filed a claim like any other creditor in bankruptcy for the money the county owed.
“Merrill Lynch’s assertion of ownership of the county’s property is illegal,” the county alleges.
The county claims, as it did in the first lawsuit, that Merrill Lynch was obliged under federal and state laws and securities regulations such as the New York Stock Exchange’s “know your customer rule,” to be aware that Citron did not have authority to borrow so heavily and to gamble public funds in unsuitable investments.
The amended complaint still names only Merrill Lynch and its subsidiaries, even though lawyers and county officials have said that they plan to pursue similar actions against other financial firms that liquidated county collateral and kept most if not all of the proceeds. Others potential targets include financial advisers, accounting and legal firms.
“We never thought this was an appropriate occasion to expand the list of defendants,” Bennett said. “We think it’s appropriate to push this case as far as possible, see what the applicable law will be, then pursue others.
“To sue more people costs the county money,” he added. “This is all about efficiency.”
Bennett said the key elements of the new complaint are the expanded explanation of the facts that resulted from the county’s investigation--an investigation that will eventually reveal even more detail.
“The factual development of this case is by no means complete,” he said. “There’s still more discovery ahead of us.”
Times staff writer Jodi Wilgoren contributed to this report.
