How Marathon Negotiation Finally Crossed Finish Line


The deal that finally ended 30 grueling months of searching for villains in America’s largest municipal bankruptcy was struck in a small, dank conference room filled with eight pink chairs.

There in the district attorney’s office, in the course of six negotiating sessions that began in late April, the Orange County district attorney and Merrill Lynch & Co. brokered a compromise that ended late Tuesday night with Dist. Atty. Michael R. Capizzi and his chief assistant, Maurice L. Evans, performing secretarial services.

Just before midnight, after a final marathon bargaining session that had begun early that morning and continued straight through lunch and dinner, the $30-million agreement became official with the signatures of Assistant Dist. Atty. Jan J. Nolan, Merrill lead negotiator Robert G. Morvillo and Paul S. Meyer, Merrill’s local counsel.

But it almost didn’t happen. The photocopier staffed by Capizzi and Evans broke down and wouldn’t collate pages. Without a secretary, Nolan was forced to type the final version herself, “and I’m not real good on the computer,” she said Thursday.


Finally, Nolan recalled, “one of the Merrill guys looks up and says, ‘If we don’t sign this in 40 minutes, it’s going to be Wednesday and we’ll have to redo all these documents.’ ”

Wearily, they all signed.

It seemed unlikely the two sides would reach that pivotal point when discussions began in late April. Merrill steadfastly maintained it did nothing wrong, and for months the company’s position never wavered even while the firm’s executives were summoned to appear before the Orange County Grand Jury,

In late April, knowing the term of the county’s grand jury would expire at the end of June, Merrill discreetly asked if the county would consider a settlement to the criminal case.



“It was Merrill’s idea,” said Assistant Dist. Atty. Wallace J. Wade.

After considering the possible benefits to the county, Capizzi told his staff to find out what the brokerage firm had in mind.

Merrill had asked the county if it would consider seeking an extension to the grand jury’s term to buy more time to plead its case. But the county declined and worried about whether extending the session was even legal. That might give Merrill another issue to attack the county with if, indeed, indictments were ever sought.

Nolan, Wade and Senior Assistant State Atty. Gen. Gary Schons represented the county; Morvillo, Meyer and occasionally three other lawyers represented Merrill. Meyer, as Merrill’s local counsel, declined comment on the proceedings.

At the first meeting, Morvillo, a Merrill lawyer from New York, related the company’s concerns over a possible indictment and outlined how it would attack the prosecution’s criminal case.

Morvillo told prosecutors that a criminal indictment would seriously damage the mammoth corporation and endanger the jobs of the firm’s 52,000 employees.

“That’s a heavy burden on a prosecutor,” Schons said. “I think everybody took that into consideration because it’s a very serious thing.”


“I don’t know whether an indictment would have put them out of business, but they were reasonably convinced it would seriously hurt them,” he added.

Merrill was also concerned with the impact an indictment would have on its position in the county’s $2-billion civil lawsuit, the pending investigation by the U.S. Securities and Exchange Commission of its role in the bankruptcy, and its relationship with industry oversight bodies such as the Municipal Securities Rulemaking Board.

If a deal could be reached, Merrill didn’t want to be prohibited from doing business in California; it didn’t want to publicly admit to any wrongdoing; and it wanted an end to the criminal investigation.

The county was focused on four bond deals in which Merrill served as the underwriter. Had indictments been sought, they would have involved alleged violations of the California Business & Professions Code.

The prosecution would have alleged that Merrill Lynch had committed an unfair business practice by failing to disclose material facts about the county’s investment pool.


The essence of the criminal case, as Capizzi described it, was this: More than seven months before the county filed bankruptcy in 1994, Merrill Lynch knew the county’s $21-billion investment pool was in precarious shape, which it failed to disclose to the buyers of the county’s bonds.

In one of the first settlement meetings, Morvillo addressed this issue head-on.


“The 1994 [bond issuing] process was not perfect and could have been improved but there was no intentional misconduct and no harm to any consumer,” he said, according to notes kept by a participant.

“Our failure should not be actionable,” he said. “But the district attorney feels otherwise so that is why we’re here to discuss a civil settlement.”

For the next several weeks, the two sides negotiated those issues, without anger or acrimony, and often in good humor.

“I have nothing but the highest respect for the team they sent in here,” Nolan said. “It was very serious and very focused, and yeah, it was intense, but it was not angry or marked by squabbling.”

Schons agreed. “These guys were just marvelous,” he said. “Morvillo and his team, they were just pros, all of them were reasonable human beings and while it was very difficult, as it went along, it was a real pleasure to be there.”

Early in the negotiations, Nolan said the talks divided quickly into three areas: the money; the terms and conditions; and the form of the settlement.

Merrill initially offered around $5 million, one participant recalled. But the county had other ideas. Capizzi felt that if the firm was indicted on the four counts--one for each bond deal--and found guilty, that a judge might levy a fine of $10 million per count, or $40 million in all.


By last Friday, Merrill had upped its offer to $25 million while most of the other major issues appeared headed to resolution.

“The main thing is offers had been made and rejected, but everybody was still talking,” said one participant. “Nobody had thrown chairs across the room.”

When the two sides met Monday, Merrill’s team included an important new member: Merrill Vice Chairman Stephen L. Hammerman, former New York regional administrator for the SEC and the man with the power to sign off on any settlement.

“We do not deserve to be indicted,” Hammerman told those assembled in the meeting, and then urged the county to take the company’s last offer--$30 million.

Finally, the county accepted.

But the next morning, Nolan said, Merrill Lynch returned to the negotiating table with a new set of documents with substantially different language in key sections. Nolan was unhappy and talks dragged on for nearly 15 more hours.

But as a practical matter, the deal had been concluded when Hammerman arrived.

As the parties were leaving, one participant recalled Hammerman, reflecting on the past 30 months and how things might have been different, saying:

“The county should never have declared bankruptcy in the first place. And if they hadn’t, none of this would have happened.”


Bullish on Settlements

Some cases settled out of court by Merrill Lynch & Co. in the last five years:

* $12.02 million in fines and restitution in a municipal securities civil case filed by the United States and state of Massachusetts. The firm paid to settle civil charges that they defrauded four public agencies. October 1995

* $25 million to end a dispute with Chilean state-owned copper producer Codelco. The dispute was related to $170 million in losses in the copper market in 1993 by a trader employed by Codelco Chile. The company alleged that Merrill employees “facilitated the traders’ unauthorized and speculative actions.” March 1997

* $12.3 million to 30 clients allegedly swindled by a former Merrill employee, Las Vegas stockbroker Janie D. Thomas. December 1994

* $30 million to settle lawsuits by investors in its ancient-art and rare-coin limited partnerships. The partnerships, which failed, were purchased by 3,500 investors from 1986 to 1990. August 1994

* $5 million to a Lebanese customer who accused Merrill of frittering away his account through unsuitable trades in currency futures. Settlement ended a five-year dispute between Merrill and Fathallah Sioufi of Paris. June 1994

Source: Times reports; Researched by DEBORA VRANA / Los Angeles Times

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