Merrill Can Try to Blame County in Bankruptcy Case, Judge Rules

Orange County was dealt a crucial setback in court Friday when a judge gave Merrill Lynch & Co. the go-ahead to forge a defense that blames the county’s bankruptcy on the Board of Supervisors and other elected officials.

The ruling by U.S. Bankruptcy Judge John E. Ryan could help undermine Orange County’s effort to recoup its unprecedented financial losses through a $2-billion lawsuit against the Wall Street brokerage. The suit accuses Merrill Lynch of selling the county illegal and risky securities that ultimately brought about the worst municipal bankruptcy in U.S. history.

Merrill Lynch, bolstered by the ruling, will try to put the conduct of county officials on trial later this year. County officials contend that they have sufficient evidence to show that the brokerage took advantage of the county and is financially responsible for its losses.

Outside court, Merrill Lynch attorney Ronald L. Olson said he was elated by the outcome.

“This is the first step in establishing and putting the blame where it belongs, at the feet of the county,” Olson said. “This is an important victory for us.”

Orange County was forced into bankruptcy in December 1994 after Treasurer Robert L. Citron’s risky investment strategy produced a $1.64-billion loss shared by the nearly 200 cities, schools and other government entities that had pooled their money.