County Files Amended Suit Against Merrill Lynch : Bankruptcy: Revised complaint states that O.C. owned the securities in the investment pool and therefore is the proper party to bring action.

Orange County on Wednesday refiled a $2-billion lawsuit against Merrill Lynch & Co., alleging the Wall Street brokerage skimmed profits from county securities and then tried to cover up its “unlawful investment scheme.”

The complaint once again accuses Merrill Lynch of triggering the county’s unprecedented bankruptcy by unlawfully extending billions of dollars in credit to then-Treasurer-Tax Collector Robert L. Citron so he could invest in exotic securities that cost the county nearly $1.7 billion.

The allegations against Merrill Lynch are detailed this time in a 105-page suit after the dismissal last week by U.S. Bankruptcy Judge John E. Ryan of an earlier suit on technical grounds.

In the revised suit, county lawyers argued that Orange County owned the securities in the investment pool and therefore was the proper party to bring a lawsuit.

“We think this complaint ought to stand,” said J. Michael Hennigan, the lead lawyer in the case, adding that the county hoped to have a hearing on the lawsuit by late November.

Merrill Lynch, which has 10 days to respond, has consistently denied any wrongdoing. On Wednesday, company spokesman Tim Gilles said the new complaint “is just more of the same sadly predictable blame-shifting from Orange County.”

The county is “rehashing 9-month-old allegations,” Gilles said. “After three tries, the county still hasn’t cured the fundamental problem with this lawsuit: As a matter of law, the securities were not and could not be Orange County’s property.”

The county’s revised suit included 24 exhibits, many of them confidential Merrill Lynch documents filed under seal.

County lawyers referred to a sealed exhibit to allege that Merrill Lynch secretly diverted profits from a $100-million Fannie Mae security it sold the county in June, 1992. Two years later, when the county decided to cash the security, it received about $100 million.

“Fraudulently undisclosed to the county, Merrill Lynch had previously arranged to sell back the security to Fannie Mae for $112.1 million, thereby secretly diverting the increase in value to itself,” the lawsuit alleges.

Responding to the allegation, Gilles said Merrill Lynch “acted properly and professionally with respect to all transactions with Orange County.”

A major contention in the revised suit is an allegation that Merrill Lynch officials duped Citron into adopting illegal and risky strategies--for its own profit.

When interest rates fell between July, 1991, and early 1994, the brokerage had numerous European customers to whom it sold complex securities whose value would jump if the rates rose.

At the same time, Citron, always ready to bet on stable or falling rates, was induced by Merrill Lynch’s brokers to buy securities that would lose market value if rates rose, the county’s lawsuit said.

“Citron was identified by Merrill Lynch as the ‘pigeon’ to whom Merrill Lynch could sell billions of dollars” in securities that few investors would touch, the lawsuit said.

Merrill Lynch officials insist that Citron’s strategies were his own.

Merrill Lynch further attempted to create “a shield of deniability” to protect the firm from liability by periodically giving vague and incomplete warnings to Citron with full knowledge that Citron would not accurately describe the investment risks to the county or the pool participants, according to the revised lawsuit.

In one instance, Merrill Lynch representatives crafted a news release for former Board of Supervisors Chairman Thomas F. Riley to combat criticisms of Citron’s investment strategy, the suit alleges. At the time, Treasurer-Tax Collector candidate John M.W. Moorlach was openly questioning Citron’s investment policies, the lawsuit states. The letter allegedly written by Merrill Lynch for Riley tried to quell such concerns, according to the county.

“Should you continue to hear Mr. Citron criticized for the way in which he invests our tax dollars, please remember the facts,” said Riley’s statement, which was included as an exhibit in the lawsuit. “Orange County’s $7.5-billion investment portfolio is much too important to be tainted by unsubstantiated political rhetoric.”

Gilles said Merrill Lynch would have no comment on the news release except to say that “this has nothing to do with any of the issues in this lawsuit.”