ORANGE COUNTY IN BANKRUPTCY : Measure R Defeat Raises the Stakes in Merrill Lynch Suit : Litigation: County officials pin their hopes for needed cash on legal action against the investment giant.

Voter rejection of a half-cent sales tax increase turns up the pressure on Orange County to obtain a bigger judgment or settlement from its litigation against Merrill Lynch & Co., securities experts and others familiar with the county’s lawsuit said Wednesday.

“I think it will make the county more likely to push the case hard against Merrill Lynch,” said Alan Bromberg, a securities law professor at Southern Methodist University in Dallas. “My short-term prediction is that it will intensify the case because now it seems the county is down to Merrill Lynch or almost nothing.”

The lopsided defeat of Measure R, which would have raised $130 million a year, also makes it more critical for the county to try to recover damages from other financial firms and professionals who sold the county securities that were part of the investment pool, which plunged $1.7 billion, triggering the bankruptcy, said Supervisor William G. Steiner.

“Now is the time to focus on all the culpable parties,” Steiner said. “Measure R was the home run. The only other home run is a big litigation settlement.”

County Chief Executive Officer William J. Popejoy agreed with Steiner.

“We’re going to continue with a full-court press,” Popejoy said. But he added: “We were going to go after them aggressively regardless of what happened to Measure R.”

So far the county has taken aim only at Merrill Lynch, blaming the brokerage firm for the collapse of the county’s investment pool. The county is seeking $2.4 billion in damages from the Wall Street giant in its lawsuit in U.S. Bankruptcy Court.

Merrill Lynch has been the prime target almost from the day Orange County filed its bankruptcy petition in December. In fact, the prospect of a big payday from Merrill Lynch has figured prominently in the county’s recovery plans.

It was a key feature, for example, in the negotiated settlement with participants in the county’s investment pool, where cities and special government districts agreed to accept the county’s promise to repay $342 million of their losses by pledging up to 65% of whatever the county recovers from Merrill Lynch and other lawsuits.

As they have from the beginning, Merrill Lynch officials insisted Wednesday they are not to blame for the county’s crisis.

“We don’t feel the tax vote changed anything,” Merrill Lynch spokesman Timothy Gilles said. “We believe we acted properly and professionally and we are very confident of our legal position. We don’t see any basis to pay for a problem we did not create.”

The county and some bond investors expect to prove otherwise. Bond investors have filed a class-action lawsuit against Merrill and several other firms in U.S. District Court in Santa Ana. Kemper Financial Services, a large investor of the county’s taxable notes, has sued Merrill Lynch in Chicago.

The county made the first move to settle the lawsuit when Popejoy flew to New York to meet secretly with Merrill Lynch Chairman and Chief Executive Officer Daniel P. Tully on May 17.

Merrill spokesman Paul W. Critchlow, a vice president and member of the firm’s executive committee, said the meeting was Popejoy’s idea, not Tully’s.

“He asked to have a meeting with Dan Tully as a courtesy,” Critchlow said. “We reiterated our position that we had acted properly and professionally and we didn’t see why we should have to pay for a problem that we did not create.”

Merrill “made it very clear that the notion of a billion-dollar payment from Wall Street firms was absurd,” Critchlow said.

Except for the exchange of documents between lawyers, there have been no discussions between the county and Merrill Lynch since Popejoy and Tully met.

Still, the Merrill Lynch lawsuit remains the best chance for an infusion of cash on a scale to help resolve the financial mess, said a lawyer familiar with the case.

Measure R’s defeat “certainly increases the pressure on the county. Where is their revenue other than litigation?”

Times staff writer Jodi Wilgoren contributed to this report.