Judge Lets Merrill Executives Keep Mum
Top-level employees of Merrill Lynch & Co. can decline to divulge details of two emergency meetings they attended in 1992 to discuss an impending crisis in the Orange County Investment Pool, a bankruptcy judge ruled Friday.
U. S. Bankruptcy Judge John E. Ryan said the brokerage’s employees can claim that the meetings are protected from disclosure by attorney-client privilege, because a Merrill Lynch lawyer was present.
Attorneys for Orange County had asked the judge to compel answers from some Merrill Lynch employees whose depositions are being taken for the county’s $2-billion damage suit against the brokerage.
According to the county’s lawsuit, Merrill Lynch sold Orange County 68% of the securities in the $21-billion investment portfolio, which included $14 billion worth of securities bought with borrowed money.
The county used virtually all of this borrowed money to buy reverse repurchase agreements, a transaction in which the seller often provides both the credit and securities being purchased.
The investment pool collapsed in December 1994 under the weight of $1.64 billion in investment losses, plunging the county into the nation’s largest-ever municipal bankruptcy.
Merrill Lynch salesman Michael Stamenson, who sold then-Treasurer Tax Collector Robert L. Citron most of the risky securities, was among the employees refusing to answer detailed questions about the meetings.
The first meeting--held on Nov. 2--was prompted by an article in a trade publication that sparked a frenzy at Merrill Lynch’s New York headquarters.
The article described Orange County as one of “a small handful of municipalities that have quietly snarfed without flinching giant quantities of municipal bonds linked to derivatives” despite a recent loss on the sale of $400 million in such exotic securities.
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 interest rates fluctuate.
In a telephone conversation with Citron, Stamenson described how, after reading the article, Merrill executives ordered him on a red-eye flight to New York to “explain” what he was up to with Citron. The meeting lasted about five hours, according to Stamenson.
Citron taped the conversation with Stamenson. The transcript was later made public.
Three days after the Nov. 2, 1992, meeting, Merrill executives tracked Stamenson to London, ordering him to catch the next Concorde back for another high-level meeting.
Stamenson told Citron that the firm was creating a sort of SWAT team to design a less perilous strategy for Orange County.
After Stamenson and others cited the attorney-client privilege and declined to provide specific answers about the meetings, county lawyers asked Ryan to rule on the issue.
Ryan said Merrill employees were within their rights to refuse to answer some questions, but added that they had used the privilege “too broadly.” The brokerage is required to permit witnesses to state “what topics were discussed at those meetings and say who spoke to whom,” Ryan said.
After the court hearing, J. Michael Hennigan, the county’s lead litigation attorney, said he will pursue details of the meetings at another hearing.
“He’s opened the door a crack,” Hennigan said about the judge’s ruling. “We’ll be back.”
A Merrill Lynch spokesman said he was pleased with the ruling.
“This has been another long and costly sideshow,” spokesman Andy Sieg said. “We would prefer to focus on the facts of the case which have shown that the responsibility for Orange County’s financial problems rests squarely with county officials.”
