Merrill Officials Testify on Roles in Bankruptcy

For the past several weeks, the Orange County Grand Jury has been hearing testimony from Merrill Lynch & Co. executives about the role the mammoth Wall Street brokerage played in the county’s record-setting bankruptcy, according to sources familiar with the investigation.

So far, about a dozen Merrill executives, as well as others who worked on county bond deals arranged by the brokerage firm, have appeared before the panel as part of a 22-month-long criminal investigation dubbed Operation Raging Steer by Orange County prosecutors, according to documents obtained by The Times.

The operation’s code name is a sardonic reference to the large bull that frequently appears in Merrill Lynch’s television ads and figures prominently in the firm’s company logo.

Another 30 or so Merrill executives who took part in decisions that affected Orange County’s ill-advised investments in risky securities have yet to testify, said the sources who cited laws governing grand jury secrecy, and spoke on condition that their names would not be divulged.

That group yet to be questioned includes several key Merrill Lynch employees, including salesman Michael G. Stamenson, who for several years worked closely with then-Orange County Treasurer-Tax Collector Robert L. Citron. Stamenson encouraged Citron to purchase billions of dollars worth of exotic securities and pursue the risky investment strategy that eventually caused a $1.64-billion loss and triggered the county’s bankruptcy, the former treasurer has testified.

Also among the Merrill executives yet to testify are Robert M. Simonson, a managing director and one of the company’s top securities traders, and Richard M. Fuscone, another managing director who headed Merrill’s fixed income securities group at the time of the bankruptcy.

Fuscone, who testified in early 1995 at hearings on the bankruptcy by a special California Senate committee, consistently defended the firm’s disclosures in bond offerings for the county, and insisted that Merrill encouraged Citron to be more forthcoming about his investment tactics with the county’s supervisors, who were largely ignorant of the risks that were taken.

Several California-based Merrill executives who dealt directly with county officials, or supervised others who did, have already or soon will be called.

Merrill Lynch spokesman Andy Sieg would not answer questions about the firm’s employees who have been subpoenaed to testify, saying only that “Merrill Lynch does not comment on investigations of this type.”

Assistant Dist. Atty. Wallace J. Wade, who heads the prosecution team, said he could not comment on any matter involving the grand jury.

Transcripts of taped interviews between county officials and investigators reveal that investigators are focusing on Stamenson’s dealings with the county.

In one such interview, former Assistant Treasurer Ray Wells told investigators he did not believe Stamenson was forthcoming about the risks associated with the investments that he sold to Citron.

“Wells said Citron relied heavily on Stamenson. . . . brokers from other firms would run things by Citron or would talk to Citron about investments, and Citron would discuss them with Mike Stamenson for his opinion,” according to a transcript that carries the heading “Raging Steer.”

During the recently concluded trial of former Budget Director Ronald S. Rubino, Citron testified that he told Stamenson about a scheme to skim interest from the accounts of the cities, school districts and other agencies with money in the investment pool Citron ran for the county.

But Citron insisted that he never revealed the scheme to Rubino, who was on trial for aiding and abetting the illegal scheme to divert money from the outside agencies into county coffers. Rubino’s trial ended in a mistrial with jurors deadlocked 9 to 3 in favor of acquittal. Rubino later pleaded no contest to falsifying a public record.

Citron said he would tell Stamenson on a monthly basis about two different earnings rates in the county’s investment pool--the rate reported to pool participants, and the actual rate Citron was earning as a result of the strategy he said Stamenson helped him develop.

The former treasurer testified at the Rubino trial that Merrill Lynch officials told him the securities he bought from the brokerage were safe “and they even encouraged it.”

Merrill officials have repeatedly denied that Stamenson knew about “any improper activities.”

Even though witnesses are now appearing before the grand jury, the sources cautioned that their testimony is being sought as part of an ongoing investigation and that no determination has been made to seek criminal indictments.

“This is still an active investigation,” one source said. “No conclusions have been reached and there is no predisposition to take it in one direction or the other.”

*

If the district attorney later decides to seek indictments, it will likely be for criminal violations of the California Securities Code under sections that deal with the disclosure of risks and the suitability of investments, the sources said.

Alan Bromberg, a professor of securities law at Southern Methodist University in Dallas, said Merrill would probably try to settle both the county’s pending $2-billion civil case and any criminal charges if any charges are eventually brought.

A comprehensive civil and criminal settlement “is more efficient and it produces less publicity and it’s probably cheaper,” Bromberg said, adding that “there is good precedent for trying to settle both the civil and criminal prosecutions as comprehensively as you can.”

Citron, who appeared before the grand jury last year and was called to testify again this year, has said that he relied heavily on Merrill’s advice about what to buy and sell, because he had little formal training in municipal finance.

The county has contended that Merrill Lynch encouraged Citron to borrow heavily and invest in securities that exposed the county’s $7-billion investment portfolio to excessive risk.

Merrill maintains that it repeatedly warned Citron against making large one-way bets on interest rates, and to diversify or hedge his portfolio to guard against potentially dangerous interest rate increases, which would drive down the value of the securities Citron had bought.

While interest rates dropped or remained stable, Citron’s pool enjoyed high earnings. But after the Federal Reserve Board raised rates several times, the pool suffered enormous losses that drained the investment pool of its liquidity in 1994 and eventually forced the county into bankruptcy.

Within the next two or three weeks, the district attorney’s office is expected to decide whether viable criminal cases can be brought against Merrill executives.

“We’re coming to a crossroads,” one source said, “where the decision will be made to put on a full-court press or decide that the case isn’t good enough.”