Judge Tries to Release Grand Jury Testimony

A judge ordered the immediate release Wednesday of testimony in the secret grand jury investigation of Merrill Lynch & Co. and its role in the Orange County bankruptcy, but the giant brokerage firm obtained a temporary stay hours later, blocking the release of 5,000 pages of transcripts to the public.

Orange County Superior Court Judge David O. Carter’s ruling is believed to be the first time any California court has opened to the public grand jury testimony in a case that did not result in an indictment. Merrill Lynch paid $30 million last month in a settlement to halt the probe two weeks before the grand jury’s term was due to expire.

“There is a compelling and fundamental right on behalf of all citizens to have access to vital information relating to the loss of over $1.67 billion,” Carter said in an 11-page ruling that was highly critical of the district attorney’s settlement with Merrill Lynch.

Late Wednesday, Merrill’s lawyers won an emergency stay of Carter’s order from the 4th District Court of Appeal, pending the filing of an appeal to vacate the judge’s order. Merrill officials said they disagreed with Carter’s interpretation of the law.

In his unprecedented ruling, Carter embraced the argument advanced by media organizations, including The Times, that the court, as the supervisory body for the grand jury, has the “inherent authority” to order the release of grand jury material.

“There are no statutes addressing the unique situation presented to the court,” Carter wrote. “It is not surprising that the Legislature has not anticipated a financial catastrophe or the bargain that has been struck between the district attorney and Merrill Lynch.”

The judge was unsparingly critical of the district attorney’s deal with the securities firm that sold the county most of the investments that led to the bankruptcy, calling the arrangement “extremely unusual and suspect.”

Carter noted that $3 million of the amount was reimbursement to the district attorney’s office for its cost in conducting the investigation, which the judge wrote “may create a conflict of interest.”

“Whether authorized by code or not, the acceptance of this payment by the district attorney seems self-serving and calculated to deter public criticism of the $2.5 million previously spent on the bankruptcy investigation.”

Dist. Atty. Michael R. Capizzi called Carter’s ruling “bizarre,” noting that Carter conducted no formal evidentiary hearing.

“There was no factual hearing to determine what the facts are,” Capizzi said. “He’s just pretty well made them up on the basis of obscure references in briefs and, I guess, from reading the newspaper and watching TV. He’s always been a bizarre judge.”

Kelli L. Sager, of the Los Angeles law firm of Davis, Wright & Tremaine, who argued on behalf of the media organizations, praised Carter’s ruling.

“This is an important victory for the public, not only of Orange County, but for the state of California,” she said. “It really strikes a blow against the idea that government officials can conduct business behind closed doors and make deals without letting their constituents know what the basis is for what they have done.”

J. Michael Hennigan, who represents the county in its $2-billion civil fraud lawsuit against Merrill Lynch in federal district court, said the release of the transcripts would help the county prove its case.

“Merrill Lynch was actively involved in the entire architecture of the scheme that ultimately led to the bankruptcy,” Hennigan said. “To the extent that this grand jury explored that theme, we’re very interested.”

In a lengthy hearing July 30, lawyers for nine parties presented Carter with arguments for and against the release of grand jury material.

Gary Schons, a senior assistant state attorney general, said no court had opened testimony without an indictment in the 147 years since the grand jury rules were written into state law.

“We are not going to seek relief in the court of appeal,” Schons said of Wednesday’s ruling. “A Superior Court opinion is just the opinion of that judge and is not binding on any other court.”

Schons and members of the district attorney’s office had argued that grand jury operations could be forever changed.

“The court disagrees,” Carter wrote. “This is a unique situation involving the largest municipal bankruptcy in our nation’s history. Disclosing the requested information will hopefully shed light on how to avoid a recurrence in the future.”

The settlement, Carter wrote, brought “unfair criticism and disrepute” and apparently motivated two grand jurors “who otherwise would have remained silent, to speak publicly on matters which occurred in closed sessions.”

Those grand jurors told The Times on July 22 that they felt the county’s case against Merrill Lynch was weak and “very complicated.”

Assistant Dist. Atty. Wallace J. Wade, who supervised the criminal investigation, said his office would comply with Carter’s order and began making copies Wednesday of 80 computer disks before the stay was granted.

Wade, who argued in court that state law required the court to keep the grand jury evidence sealed, said he did not view the ruling as a setback and continues to believe “that secrecy helps the grand jury system in the long run.”

Capizzi opened the door to the prospect of public review of the transcripts at a news conference in mid-June to announce the deal with Merrill. He said at the time that he would research the law to see if they could be released.

Media companies immediately asked Carter, as the supervising judge of criminal courts, to release the testimony.

Carter then sent notices inviting written legal briefs, and conducted a hearing July 30.

Arguing for release were lawyers for The Times and other media companies that have covered the bankruptcy story, as well as former Treasurer Robert L. Citron, and county bankruptcy attorney Bruce Bennett.

Arguing to keep them secret were lawyers for Merrill Lynch, securities salesman Michael G. Stamenson, the district attorney and the attorney general.

Times correspondents Mimi Ko Cruz and Jeff Kass contributed to this report.