Merrill to Pay O.C. $30 Million in Settling Criminal Proceeding


Saying that a settlement with Merrill Lynch & Co. was in the best interests of taxpayers, Dist. Atty. Michael R. Capizzi announced Thursday that the giant Wall Street firm will pay a record $30 million to avoid prosecution for its role in Orange County’s disastrous plunge into bankruptcy.

“We got everything we could possibly hope to achieve, and we did it at substantial savings to the taxpayers of Orange County,” Capizzi said at a hastily arranged news conference Thursday morning.

“It was in everybody’s best interest that we reached this resolution” of the 2 1/2-year investigation conducted by criminal prosecutors and two successive county grand juries, he said.

While members of the Board of Supervisors praised the settlement, others involved in the epic bankruptcy were not so pleased, criticizing Capizzi for “selling out” to Merrill Lynch, and for possibly jeopardizing the county’s separate $2-billion civil lawsuit against the giant firm.


Orange County Treasurer-Tax Collector John M. W. Moorlach, who warned of a looming disaster in the county’s investment pool months before the bankruptcy, said Thursday that he was “disappointed that Merrill Lynch didn’t get indicted.”

“They made some serious errors in judgment that found them in violation of state codes,” Moorlach said. “I think Merrill Lynch did what was right for Merrill Lynch.”

“It’s a total sellout,” said attorney David W. Wiechert, who represented former Treasurer-Tax Collector Robert L. Citron against criminal charges brought by Capizzi.

“This settlement establishes a woeful precedent,” Wiechert added. He said the district attorney vigorously prosecuted six county officials who didn’t make a dime from the county’s financial misdealings, yet he “has given Merrill Lynch a pass even though [it] profited more than any other firm from the county’s investment purchases and financing.”


Said Wylie Aitken, the attorney who defended former Supervisor Roger R. Stanton against charges brought by Capizzi: “Apparently, what Merrill Lynch did is buy silence, and at a fairly insignificant price if you look at their net worth.”

The Wall Street giant recorded profits of $1.6 billion last year and $1.1 billion the year before. The settlement thus represents about 1% of the firm’s profits over the last two years.


For its part, the nation’s largest brokerage firm issued a statement saying that it too was “pleased that this settlement resolves all issues related to the district attorney’s investigation of the company’s relationship with Orange County. . . .”

“We continue to believe we acted properly and professionally in all facets of our relationship with Orange County and have entered into this settlement to resolve this matter in a way that avoids the substantial cost and distraction of protracted litigation,” the Merrill statement said.

Most of the bad investments that cost the county $1.64 billion in losses were purchased from Merrill Lynch, which also underwrote many of the bond sales whose proceeds Citron used to buy the risky securities.

But county supervisors and other top officials expressed support for the settlement, which they said would provide the county with an unexpected windfall while sparing taxpayers the expense of a lengthy trial that would produce an uncertain outcome.

“Any time you can get money coming into the county, we’re happy,” said Supervisor Jim Silva. “We just don’t want to give the impression that this thing is over, because it’s only beginning. This is just a token payment from Merrill Lynch for the crimes it committed against the county.”


Merrill Lynch, Capizzi and other county officials insisted that the settlement would have no effect on the county’s civil suit. But some legal experts disagreed and said that Merrill Lynch benefited more from the settlement, because it is now free of the threat of criminal indictments or civil complaints from a grand jury.

“It strengthens Merrill Lynch’s hand in the civil litigation with Orange County,” said Geoffrey Miller, a professor of commercial law at New York University, who noted that Merrill “now has the ability to claim that this is just a matter of dollars. . . . By cutting off the most damaging kinds of possible charges--that is, the criminal charges--Merrill Lynch doesn’t face the . . . potentially adverse publicity” that would have weakened its hand.

Alan Bromberg, a securities law professor at Southern Methodist University in Dallas, agreed. “It sounds like a very significant victory for Merrill Lynch. Any time you’re out from under a criminal case, you’ve won a victory even though it may have cost you $30 million,” he said.

Bruce Bennett, the Los Angeles attorney leading the county’s litigation against Merrill, said the $30-million settlement speaks for itself and does not harm the county’s case.

“I don’t think anyone is in a position to second-guess Mr. Capizzi,” Bennett said. “The size of the fine is a sufficient reflection of the severity of the conduct that was addressed today. Merrill can say they did nothing wrong till they’re blue in the face. Today, they have provided 30 million admissions of responsibility.”

Board of Supervisors Chairman William G. Steiner agreed. “Merrill Lynch said this is not an admission of guilt. But $30 million is a pretty significant penalty,” he said. “I think this is a small down payment on what we expect to receive through litigation.”

While Merrill Lynch has clearly relieved itself of any criminal problems it may have faced from authorities in California, it is still under threat from the U.S. Securities and Exchange Commission. The SEC notified Merrill more than a year ago that it could face securities charges related to its Orange County activities.

Capizzi announced the size of the settlement at a press conference held in a small conference room at the Central Courthouse, illuminated by glaring spotlights and packed with dozens of television crews and reporters.


At times, Capizzi seemed frustrated as reporters peppered him with questions about whether Merrill Lynch had bought its way out of a criminal indictment.

“That’s not true,” Capizzi said. “I had made no determination as to whether or not there was a chargeable crime. No final decision had been determined about an indictment. . . . That was totally unnecessary based on the resolution of the case.”

The settlement agreement said Capizzi believed there was evidence that Merrill Lynch had engaged in fraudulent and deceptive practices in violation of criminal provisions of the state’s Business and Professions Code.

The $30 million from the settlement will be deposited in the county’s general fund within seven days. Capizzi said $3 million will go to cover the costs of his investigation, while the remainder will stay in the county’s coffers. The money will be a windfall for a county that had to slash budgets and lay off more than 500 employees in the wake of the bankruptcy. But Steiner said he would like to see some or all of the windfall distributed to the 28 county school districts that lost money in the bankruptcy as “a good-faith effort to help make them whole.”


Silva said the money must be deposited in the county’s general fund, but that he too would consider providing some funding to the schools. But it remains unclear, Silva said, what discretion county officials will have, if any, in determining how the $27 million is spent.

Supervisor Thomas W. Wilson suggested it might make more sense to divide the money between the schools and “some project that benefits the people in general"--such as a proposed South County courthouse that is still in need of seed money.

But Supervisor Charles V. Smith said the windfall should stay with the county to address its own needs. Smith said the schools are first in line to receive proceeds from the county’s civil litigation against Merrill Lynch and others.

County school districts were among the more than 200 government agencies with deposits in the county’s ill-fated investment pool, which suffered $1.64 billion in losses in late 1994, prompting the county to declare bankruptcy.

Before focusing their investigative efforts on Merrill Lynch in an operation they dubbed “Operation Raging Bull,” Capizzi’s prosecutors had concentrated on gathering evidence of possible wrongdoing by county officials.

In December 1995, they persuaded the Orange County Grand Jury to issue civil accusations charging Supervisors Stanton and Steiner and Auditor-Controller Steve E. Lewis with willful misconduct in office for failing to properly oversee the activities of Treasurer Citron.

The charges against Stanton and Steiner were eventually thrown out by an appellate court, and the district attorney’s appeal to the California Supreme Court did not succeed.

That same Orange County Grand Jury also indicted former Assistant Treasurer Matthew R. Raabe on six counts of securities fraud and misappropriation of funds. Raabe was convicted in April and is currently the subject of a pre-sentencing investigation being conducted by the California Department of Corrections. He faces up to 13 years in prison when he is sentenced later this summer.

Also indicted was former Budget Director Ronald S. Rubino, for allegedly aiding and abetting a scheme to divert money from the county’s investment pool. Rubino’s trial ended in a hung jury, with jurors deadlocked 9 to 3 in favor of acquittal. He later pleaded no contest to a felony charge of falsifying a public record.

Citron, who handled most of the multibillion-dollar dealings with Merrill Lynch, pleaded guilty in April 1995 to the same felony charges Raabe faced. He was later sentenced to serve a year in county jail and pay a $100,000 fine. He is currently serving his sentence in a work-release program that allows him to work in the jail commissary and spend his nights at home.

The district attorney’s investigation of Merrill Lynch centered on the brokerage firm’s role in underwriting four 1994 bond issues of the county and the Orange County Flood Control District.

Capizzi said prosecutors were focusing on the bond issues to determine whether Merrill Lynch provided adequate disclosures about the state of the county’s investment pool. “The law states that they be complete, accurate and contain no omissions,” he said.


In addition to the cash payment, Merrill Lynch also agreed to change the way it does business in municipal financing, and agreed to implement both new procedures and staff training--a condition Capizzi said will help prevent another bond debacle.

Under its agreement, Merrill is obligated to submit an annual report to the state attorney general and the Orange County district attorney’s office for each offering in California. Merrill will also appoint a “disclosure agent” to ensure “full disclosure” regarding the financial condition of the issuer.

While the settlement brought widely varied reactions, county officials, community activists and others could talk about little else on Thursday.

“I’m glad that they’re settling, which will save us a lot of litigation money,” said Jean Askham, president of the Orange County League of Women Voters. “We’re still recovering from the bankruptcy and litigation costs are sky-high. So that in itself has to be a good thing.”

Bill Mitchell, former Orange County chairman of Common Cause, said it does not bother him that the settlement precludes criminal liability on the part of the investment firm’s officers. “The people who were the most responsible really haven’t been held accountable. Why should Merrill Lynch be held to a higher standard? The people who were elected to do the job weren’t [held accountable].”

“In business, you don’t go to jail,” Mitchell said. “You pay money.”

Contributing to this report were Times staff writers Davan Maharaj, E. Scott Reckard, Debora Vrana, Martin Miller, Scott Martelle, Nick Anderson and James S. Granelli and librarians Sheila A. Kern and Lois Hooker.


What $27 Million Buys

About $3 million of the $30 million Merrill Lynch & Co. will pay Orange County is set aside for investigation costs. The other $27 million could pay for any of the following:

642 Teachers

540 Portable classrooms

18 Police helicopters

19,000 Computers with Internet access

2,250 Fully trained police dogs

1,350 Police cars

15,000 Antique-style street lamps

112 All-terrain fire engines

Sources: Times reports; Researched by NICK ANDERSON and SHELBY GRAD / Los Angeles Times