Merrill Ruling Removes Firm’s Biggest Cloud


Although Merrill Lynch still faces civil lawsuits and a Securities and Exchange Commission probe for its role in the Orange County bankruptcy, Wall Street observers say Thursday’s criminal settlement removed the biggest cloud hanging over the brokerage giant.

“The last thing they wanted was a criminal trial,” analyst Charles M. Vincent of PNC Securities said, adding, “The civil stuff they can handle, but an indictment would have meant a bad image for a company that thrives on image.”

The Wall Street powerhouse agreed to pay the county $30 million to avoid prosecution for its role in the bankruptcy.

Within the municipal bond community, some competitors thought Merrill “got off easy,” in the words of one bond dealer who asked not to be identified.


There is evidence, however, that the firm’s troubles in Orange County and other missteps in Massachusetts and New Jersey have tarnished its reputation and cost it some customers in a fiercely competitive business.

From its lofty perch as the No. 1 muni bond underwriter in 1994, Merrill has slipped steadily, to second place in 1995, third place last year, and fifth place so far this year, according to Securities Data Corp.

Merrill Lynch shares dropped $1 to $61.625 on Thursday on the New York Stock Exchange. It was a mixed day for brokerage stocks generally, though, and Merrill’s downturn may not mean investors viewed the settlement negatively, analysts said.

On the contrary, several experts regarded the settlement as a definite plus. One such Merrill watcher said the settlement “removes uncertainty, and investors hate uncertainty.”


Separately, sources said the SEC has decided not to press civil charges against two top Merrill Lynch executives it had scrutinized: Managing Directors Richard M. Fuscone and Robert M. Simonson.

Several sources said the SEC is still investigating the brokerage and other employees, including Michael G. Stamenson, who sold former county Treasurer Robert L. Citron billions of dollars’ worth of risky securities.

The SEC is focusing on alleged failures to disclose the high-risk nature of Orange County’s $20.5-billion investment pools. Losses of $1.64 billion in the pools led to the nation’s biggest municipal bankruptcy.

David W. Wiechert of Costa Mesa, Citron’s attorney, said it is “unfathomable” that the SEC has not charged Merrill Lynch more than 2 1/2 years after the bankruptcy. Wiechert has portrayed Citron as a patsy for the brokerage’s aggressive sales staff.

The county also has filed a $2.4-billion lawsuit against Merrill Lynch, accusing it of concocting investments for Citron so risky that they broke state law.

Merrill Lynch spokesman Timothy Gilles denied the allegations, saying Citron devised his own investment strategy.

For Merrill Lynch, which logged a record profit of $1.6 billion last year, municipal bond underwriting is a small piece of a huge global business. Stock underwriting and retail brokerage, for example, are far more important to the company.

Still, Merrill--the nation’s largest securities firm--is used to dominating most of its lines of business, and its stumble from the top spot in muni bonds has been painful.


Besides Orange County, two other controversies have contributed to Merrill’s loss of market share in the $180-billion-a-year industry.

Last August, a federal jury in Boston convicted Mark S. Ferber of fraud and bribery and sentenced the former Lazard Freres & Co. partner to 33 months in prison and a $1.65-million fine.

The jury found that Ferber, while acting as financial advisor to the bond-issuing Massachusetts Water Resources Authority, illegally concealed the terms of a deal under which he was paid to help Merrill Lynch obtain muni bond business.

And in New Jersey, Merrill was tarred by a federal investigation into questionable business deals between several of its employees and a securities firm half-owned by the former chief of staff of then-Gov. Jim Florio.

Merrill has denied wrongdoing in both cases, but the aroma of the “pay-for-play” allegations has stayed with the firm.

In pitching his services to bond issuers, a salesman for a rival firm said he never mentions Merrill’s troubles. “I don’t use that stuff,” he said, “but I don’t have to. Everybody’s aware of it.”

Times staff writer James S. Granelli in Orange County contributed to this report.



Some praise the $30-million settlement, others condemn it. A1