Tape Shows Merrill Gave ’92 Warning on O.C. Pool : Bankruptcy: Two years before collapse, top salesman is heard on tapes telling Citron of firm’s concern that investments were too concentrated in high-risk derivatives.


More than two years before Orange County’s investment pool collapsed, panicky Merrill Lynch & Co. officials warned then-Treasurer-Tax Collector Robert L. Citron that the county’s investment holdings were too concentrated in high-risk securities and formed a “SWAT team” to avert disaster, according to a taped conversation made public Thursday.

Concern was so great at Merrill Lynch & Co. that the bond salesman handling the county’s account was abruptly summoned from London back to New York--while en route to vacation in Africa--in order to explain the county’s investment portfolio to alarmed superiors in New York, according to the taped telephone conversation between Citron and the salesman, Michael Stamenson.

“We’re trying to look out for our best interest, your best interest so that, you know, we don’t get into trouble here,” a harried-sounding Stamenson said during the Nov. 9, 1992, telephone conversation.

“It is the belief of everybody but me, to be honest about it Bob . . . that you are too concentrated in the [highly volatile securities],” Stamenson said. “You’ve got too many of your eggs in one basket.”


During the 40-minute conversation, unsealed Thursday by an Orange County judge, Stamenson told Citron the firm had considered asking him to obtain a letter from county supervisors endorsing Citron’s risky strategy, but dropped the idea because they were sure he would refuse.

Stamenson said officials at the Wall Street giant were especially edgy over an article that had recently focused attention on Merrill Lynch’s selling of high-risk securities.

“It went through Merrill Lynch like an ICBM missile,” Stamenson said. Stamenson said his superiors approached Citron’s potential problems from “a gigantic save-your-ass point of view.”

But at the same time Stamenson conceded “there was probably a lot of truth” in his bosses’ concerns. “They want to see you kind of turn the ship a little bit” to reduce the county’s risk, Stamenson told Citron.

He reassured Citron there would be no change in the county’s relationship with Merrill Lynch, saying, “This is not going to impact your reverse repo limits.”

Citron, sounding by turns befuddled and combative, accused Merrill Lynch officials of waiting until it was too late to warn him of the perils of the high-risk securities. “During [the] year and a half [after] starting to buy these things in July of ’91, you or nobody at Merrill Lynch ever came to me and said, ‘You know, you shouldn’t be buying so many of these things.’ ”

Citron complained that no one at Merrill had warned “there is a danger, some sort of danger in buying some of these things and you certainly shouldn’t be buying . . . such a large percentage of your portfolio in these things.”

Citron said that a representative from a rival brokerage, J.P. Morgan, warned him seven months earlier that his holdings were too volatile. But Citron recalled that Stamenson and other Merrill Lynch officials pooh-poohed the rival firm’s warnings.


“Merrill Lynch has some culpability in this situation,” Citron said.

But Stamenson said the new warnings he brought were being offered in a spirit of friendship with one of the firm’s best clients.

“You are a very good friend of ours and do a lot of business with us and we’re very respectful. . . . We want to make sure everything goes well for you so that somebody out there doesn’t decide to shoot arrows at you and have one of them hit on target and complicate your life,” Stamenson said.

The tape provided new ammo to both sides, who have pointed blame at each other since the bankruptcy.


Citron’s lawyer, David W. Wiechert, said the conversation provided “incontrovertible evidence that Merrill Lynch was guiding and fashioning Orange County’s investment strategy.”

Stamenson in fact speaks of the “guidance” that Merrill Lynch was providing Citron. “We are not embarrassed by any of the things that we have sold you so far or any of the guidance that we have given you.”


Merrill Lynch officials on Thursday denied they had been seized by panic, saying the review of Citron’s investments were “methodical.” Officials also said the firm had no authority to “put the kibosh” on Citron’s subsequent purchases of volatile securities.


“This transcript is entirely consistent with what we have said all along,” Merrill Lynch spokesman Timothy Gilles said.

“We repeatedly cautioned [Citron] about his risk profile, we offered opportunities to adjust it, we urged appropriate disclosure of his strategy, received assurances from him that such disclosures had been made and that Merrill Lynch had behaved properly and professionally in its dealings with Orange County,” Gilles said.

The audiotape, seized by investigators during a search of Citron’s office on Dec. 20, provides the first close glimpse into the almost daily dealings between the ex-treasurer and the salesman, who Citron now contends steered him into a series of financial crimes for which Citron has pleaded guilty.

The evidence unsealed Thursday also suggests that Citron had a habit of secretly taping conversations. At several points in the conversation with Stamenson, Citron refers to other discussions he has recorded. At the end of the tape is a leftover conference call including Citron, Stamenson and two men with British accents. Investigators seeking a search warrant alleged that Citron had recorded his conversations for years.


“Citron taped conversations in a secretive manner which supports my belief he may have maintained documentation on tape to support his positions, and thus may have saved some tape recordings which he believed someday might be of value in explaining his actions,” said Michael Major, a district attorney’s investigator.

The tape and two search warrants were unsealed as Orange County Superior Court Judge David O. Carter ordered prosecutors to give Citron’s attorney a mountain of evidence meant to help him prepare for sentencing on Dec. 29.

Citron’s attorney sought release of more than 1 million pages of evidence to bolster his argument that an ailing Citron may have been manipulated by other county officials and brokers into diverting interest and falsifying documents related to the investment pool that Citron managed for the county and 200 government agencies.

Attorney Wiechert is seeking probation instead of a prison term for the 70-year-old Citron, who faces a sentence of up to 14 years.



Carter denied most of Wiechert’s requests but ordered prosecutors to release more than 35,000 pages of documents and 300 taped interviews relating to the prosecution of Citron’s onetime deputy, former Assistant Treasurer Matthew Raabe. Raabe awaits trial on the same felony charges to which Citron admitted guilt.

Carter unsealed the Stamenson tape and two related search warrants over the objections of Deputy Dist. Atty. Matthew Anderson, who argued it might tip the hand of investigators probing the roots of the bankruptcy.

But Carter warned that the tape also could undercut Wiechert’s attempt to portray his client as an unsophisticated investor duped by others with more financial savvy.


The tape reveals a brokerage consumed by concern for its public image and a treasurer reluctant to take full responsibility for a high-flying investment strategy that once won him plaudits, but later caused catastrophic losses when interest rates rose.

In May of this year, Merrill Lynch officials released internal memos that show that the brokerage first began questioning Orange County’s risky investment policies in early 1992. By summer, executives began writing that the firm needed to develop a “portfolio analysis” for Citron because his heavy borrowing had left his holdings extremely sensitive to interest rate changes.

In October, 1992, Stamenson wrote Citron, urging him to “constantly review the volatility” in his portfolio.

But the tape reveals the dawning realization at Merrill Lynch that one of its top salesmen had landed the firm in a highly precarious position--just as officials from the Securities and Exchange Commission, the Treasury Department and regulators were visiting Merrill Lynch to review the exploding derivatives market.


Stamenson explained to Citron that the frenzy at Merrill’s New York headquarters was prompted by an article that had just appeared in the publication Derivatives Week.

The article described Orange County as one of a “small handful of municipalities that have quietly snarfed without flinching giant quantities of bonds linked to derivatives” despite a recent a loss on the sale of $400 million in exotic bonds.

Merrill Lynch, the article said, “the most aggressive seller to municipalities of derivatives-linked bonds--and to Orange County in particular--was rumored to have structured rescue bonds or employed other strategies” to help the county stem potential losses from the bonds as currency rates fluctuated dramatically.

Stamenson described how, after reading the article, Merrill executives ordered him on a red-eye to New York to “explain” what he was up to with Citron in a five-hour meeting with top executives.


Three days later, Merrill executives tracked Stamenson to London, ordering him to catch the next Concorde back for another high-level meeting.

Meanwhile, another broker flew out from the Bay Area and worked all night to prepare information for a second grilling by “everybody from . . . the janitor to the chairman of the board,” Stamenson said.


Stamenson told Citron that the firm was creating “a SWAT team” made of a top trader, the official in charge of derivatives and some other high-ranking people to design a less-perilous strategy for Orange County.


Stamenson described the New York meetings as “very surreal, self-cleansing, self-examination.”

Citron, stammering frequently during the conversation, listened with little comment until the final five minutes, when he pointed the finger back at Merrill Lynch, suggesting the firm was primarily worried about its own liability.

“I’m saying to Merrill Lynch, yeah that’s fine, but where were you for the year and a half that you were, you know, selling me all this stuff,” Citron said.

Stamenson did not dispute Citron’s “historical analysis, from when we start to where we are [is] basically very accurate.”


Times staff writer Michael G. Wagner contributed to this story.