Dozen Losers in O.C. Pool Sue Brokerage

An alliance of 12 California cities and water districts on Monday filed yet another lawsuit against Merrill Lynch Inc., claiming the firm fraudulently misled them, causing them to lose more than $50 million when Orange County’s investment pool crashed.

The plaintiffs primarily are cities outside the county that selected Option B when a pool settlement agreement was reached earlier this year. That option gave cities 77% of their investments but preserved their rights to sue the county and others who may have been responsible for the pool’s collapse last December.

On Monday, they exercised those rights by filing a 33-page lawsuit in San Francisco Superior Court.

Daniel Bellin, a lawyer for 10 cities and two water districts, said the case was filed in San Francisco because that is where Merrill Lynch executive Michael Stamenson kept his office. Stamenson was the salesman who made commissions on sales of billions of dollars in exotic investments sold to the investment pool managed by former Orange County Treasurer-Tax Collector Robert L. Citron.

The pool lost about $1.7 billion, plunging Orange County into bankruptcy.

The allegations in the suit are similar to those in a $2.4-billion lawsuit the county filed against the Wall Street brokerage giant. In addition, several bondholders who had each purchased $5,000 to $600,000 worth of county bonds have filed a separate class-action lawsuit in federal court in Santa Ana against Merrill Lynch, alleging that it fraudulently misled them into believing that the county’s finances were in better shape than they were.

Merrill Lynch officials have denied any wrongdoing. On Monday night, company spokesman Timothy Gilles said, “Merrill Lynch acted properly and professionally in its relationship with the Orange County treasurer’s office, and this [latest] suit is just a continuation of efforts by responsible officials to shift the blame onto others.” The suit, Gilles said, “is absolutely without merit.”

But Bellin said his complaint was based in part on testimony by Merrill Lynch officials to the California Senate Special Committee on Local Government Investments that the firm gave financial advice to Citron “on virtually a daily basis,” the attorney said.

The lawsuit claims, as does the county, that Merrill Lynch violated a fiduciary duty by failing to invest public funds in safe and sound investments.

“The ‘B’ participants who have brought this suit are victims of what went on in the Orange County investment pools,” Bellin said.

The lawsuit also raises the novel claim that Merrill Lynch violated the California Penal Code by receiving “stolen property,” in this case the funds entrusted to Citron.

Those bringing the suit are the cities of Atascadero, Buena Park, Claremont, Milpitas, Montebello, Mountain View and Santa Barbara, the Community Redevelopment agencies of Buena Park, Montebello and Santa Barbara, and the Santiago County Water District and Yorba Linda Water District, both in Orange County.