Brokerage Asks Judge to Throw Out Parts of O.C. Suit

Attorneys for Merrill Lynch & Co. asked a federal judge Wednesday to toss out portions of Orange County’s damage suit which claims that the billion-dollar loans the Wall Street brokerage made to former Treasurer-Tax Collector Robert L. Citron were barred by state law.

“The county and its treasurer repeatedly represented, to Merrill Lynch and many others, that [Citron’s] investment activities were fully authorized,” said Ronald L. Olson, a Los Angeles attorney for Merrill Lynch.

In hundreds of pages of court documents, Olson asked U. S. District Judge Gary L. Taylor to rule that Citron had the legal authority to borrow billions from Merrill Lynch and other Wall Street firms.

The former treasurer used the borrowed money to gamble on some of the riskiest securities ever devised by Wall Street.

Olson’s request came in response to an assertion by county attorneys last month that the loans to Citron were prohibited by the state Constitution, which bars cities and counties from borrowing more than they can repay from their annual budgets.

A ruling by Taylor on the legal issue--now tentatively scheduled for Jan. 12--could accelerate the resolution of a dozen damage suits against brokerages the county blames for its historic bankruptcy.

County attorneys have argued that Citron used the borrowed money to enter into reverse repurchase agreements, a transaction in which the seller provides both the credit and securities being purchased. These transactions were prohibited, because state laws require that they be budgeted for, they contend.

Merrill Lynch and other brokerages have argued that the $1.5-trillion market in reverse-repurchase agreements will be at risk if California’s law is interpreted the way Orange County is asking. Municipalities across the state and nation borrow money through repurchase agreements.

But Olson argued Wednesday that “if the county’s theory is correct, counties across California also have been engaged in billions of dollars of invalid reverse repurchase agreements.”

Under the county’s interpretation of the law, “hundreds of billions [or more] of California municipal investments over the past decade are utterly void,” Olson said.