Merrill Lynch’s Legal Fees Jump Due to O.C. Mess : Brokerages: The 21% increase comes mostly from the ongoing battle over bankruptcy, a company spokesman says.

A new hint of the burdensome cost of the legal war between Orange County and Merrill Lynch surfaced Tuesday as the brokerage reported a steep increase in legal and other professional fees.

A spokesman for Merrill Lynch & Co. said that a 21% increase over last year in professional fees, to $105.4 million compared to $87.2 million for the same three months last year, was due in large part to the Orange County litigation.

It comes two months after Orange County reported that payments to its litigation lawyers totaled at least $3.6 million through June 30.

“I think it will be an ongoing cost factor because you have to pay the lawyers,” said Charles M. Vincent, an analyst with PNC Investment Management and Research in Philadelphia who tracks Merrill Lynch.

The increase was paltry compared to the New York-based brokerage’s earnings of $283 million, or $1.40 a share, for the second quarter, but the rise in legal costs gives some insight into what may become protracted and expensive litigation in Orange County.

The county has sued Merrill Lynch for its role in developing the risky investments under former Treasurer Robert L. Citron that led to the loss of $1.7 billion in the county investment pool.

In its amended complaint, the county alleges that Merrill Lynch unlawfully extended billions of dollars in credit to Citron so he could invest in interest-rate-sensitive securities. The county lost big when the bet on the direction of interest rates proved wrong.

Merrill Lynch has vigorously denied the allegations, saying that Orange County officials have failed to take responsibility for the actions.

The amended complaint, filed June 6 in U.S. Bankruptcy Court, asks for $2 billion in damages from Merrill Lynch.

Regardless of the outcome, pressing and defending the suit is already proving expensive for both sides. The county reported in May that its litigators in the Los Angeles firm of Hennigan, Mercer & Bennett had increased their prospective fees from $2.5 million to $3.6 million through the end of June. Merrill’s increase in professional costs, of which a spokesman said “some but not all” were related to Orange County, was a small bit of bad news in an otherwise strong quarter. Earnings were 12% higher than in the same period last year, a better than expected increase. It came on revenue of $2.5 billion.

Analyst Vincent said booming growth in the stock market fueled Merrill Lynch’s rise in earnings. Lower interest rates will help the bond market as well.

Vincent said that the legal costs could become a balance sheet fixture for both sides as the case proceeds. “Lawyers become a lot more expensive when they actually go to trial,” he said.

In the meantime, he said, Merrill Lynch may set aside some of its earnings into a pool that would be used in the event of a settlement or unfavorable court decision. A Merrill spokesman said, however, that the company does not discuss reserves.