Is Merrill Lynch the Golden Sheep, Waiting to Get Fleeced?
Orange County cities and school districts are pinning their hopes of full post-bankruptcy repayment on donning blindfolds and taking a swing at the Merrill Lynch pinata, hoping that a half-billion (or is it 2 billion?) dollars come flying out.
An intriguing scenario, but how likely is it?
Much like I depend on the TV lawyers to walk me through the O.J. Simpson trial, I solicited a Newport Beach investment banker to speculate about the proposed Orange County-Merrill Lynch fight. What’s happening behind the scenes? Who’s holding the stronger hand? What will the courtroom strategy be? What is the likely outcome?
My “expert” started his own company 17 years ago and had written to me last December, explaining how Citron got the county into its mess. Because I volunteered him for the job at hand, I promised him anonymity.
I began by asking about the plausibility of the lawsuit. The better question, he said, is whether the county could file the suit with a straight face.
Could they? I asked. “Just barely,” he replied. “ . . . Did Merrill Lynch conduct some kind of maneuver that skunked [former county treasurer] Bob Citron? That would be the basis on which they could have filed.”
That is, indeed, the heart of the county’s contention. Merrill Lynch counters that it provided Citron with brokerage services, but that the longtime treasurer is responsible for all the financial decisions.
That’s where the chess game begins. Even if it believes it’s done nothing wrong, Merrill Lynch isn’t interested in a protracted court case, he said. “It’s always good to get your bad news behind you. And you never know what a judge or a jury might do.”
A jury might sympathize with what it sees as “the poor Orange County folks who were improperly advised by the professionals on Wall Street, with their white pressed shirts and Hermes ties and wingtip shoes, and here’s old Bob Citron with his Indian jewelry on, so obviously he didn’t have a clue. He was duped.”
That fear, he said, might entice Merrill Lynch to settle. In essence, the firm would rationalize, “Gee, we make a lot of money; sometimes you have to give some of it back.”
I asked if he thought Merrill Lynch has already made an offer. “I’m sure discussions have been going on and if the county had been willing to settle for $50 or $60 million, it would have had the check by now. That’s a big figure, it solves a lot of problems, and it’s a number which is only a couple times more than what they’ll pay in legal fees. My guess is the $50 million is on the table now, and it probably won’t come off, or when it does, that’s when there will be action on it.”
So, why hasn’t it happened? “My guess is the [county’s] attorneys don’t want to settle now. They’ve got a great deal going. They know Merrill Lynch may finally settle, but why so early? Why not get another year of fees? That’s my educated guess. I know when attorneys want to settle, it’s not always at a time when it’s best for the client.”
I reminded him that county officials have talked of not settling for anything less than hundreds of millions of dollars. My source scoffed at that.
What about $500 million to $1 billion as a settlement figure? I asked. “Merrill Lynch is a public company. If I’m on the board of directors, I want to get this settled, but I sure as hell understand that it’s worth going to court if the settlement is going to be worth more than nine figures [$1 billion]. The low nines might work for me, I might still be on the board the next morning if I agree to that, but 10 figures--I don’t think I’m on the board the next day.”
Put yourself in Merrill Lynch’s shoes, I said. When does their proposal of $50 million rise to, say, $100 million?
“Maybe two, three years down the road, when it becomes clear they’re looking at a jury trial, when they’re on the steps of the courthouse, the broker is not looking so hot, the excuses are not looking so good, the jury is here in Orange County, they’re going to get creamed. . . . So, it becomes $100 million.”
So, the county is holding all the cards?
Not so fast, he said. “I think a jury gives the county a great advantage, but you never can tell.” A jury might well conclude, he said, that Orange County merely represents a variation of a big business, with arrogant, incompetent officials who made bad choices. And keep in mind, the banker said, that Merrill Lynch will try to await the outcome of the county’s legal fight with its accountants, KPMG Peat Marwick. Suppose, he said, the county gets little or nothing from that. That might embolden Merrill Lynch to pull even its $50 million off the table--money the county could probably have right now.
Does the county want to take that chance? he asked, rhetorically. Besides, he said, even if the county thinks a jury would be sympathetic, the trial would probably embarrass county officials more than once.
Sounds like the scenario for an out-of-court settlement, I said. The banker agreed.
What would it take to make this go all the way to court? I asked.
“It goes to trial, in my opinion, if Merrill Lynch decides the county is going to continue to be overreaching, and anything over $100 million gets into that neighborhood. Below that, everyone can just go home, and it’s a win-win.”
*
Dana Parsons’ column appears Wednesday, Friday and Sunday. Readers may reach Parsons by writing to him at The Times Orange County Edition, 1375 Sunflower Ave., Costa Mesa, CA 92626, or calling (714) 966-7821.
