No Bankruptcy at Merrill: Profit Is $481 Million

Remember that $30 million that Merrill Lynch & Co. paid the Orange County district attorney, ending the criminal probe of its involvement in the county’s monumental bankruptcy?

The big investment house’s shareholders probably won’t be giving it much thought: Merrill Lynch reported Tuesday that it turned a $481-million profit in its second quarter.

It was the highest quarterly earnings in Merrill Lynch’s history. It was also 16 times the amount of the settlement with Dist. Atty. Michael R. Capizzi.

To look at it another way: Merrill Lynch this year has averaged a profit of more than $5 million a day. That makes the $30 million settlement less than six days’ net income.

And, the $30 million wasn’t even Merrill Lynch’s costliest special expense during the quarter.

That distinction went to the $45 million set aside for wealthy private clients in Asia, where former Merrill Lynch financial consultant Kevin Wallace of Singapore is accused of losing money on unauthorized trades, then falsifying documents and forging signatures to cover it up.

The huge profit renewed criticism that Capizzi let the Wall Street firm off with too small a payment, no admission of guilt and the transcripts of months of grand jury testimony sealed.

“I’m sure that the Merrill people are laughing all the way to the bank,” said David W. Wiechert, attorney for former county Treasurer-Tax Collector Robert L. Citron, who contends the firm steered him into the strategies that lost $1.64 billion in 1994. Wiechert said he hopes Capizzi at least makes good on his wish to try to persuade a judge to unseal the grand jury testimony and exhibits.

That’s needed “so that the public realizes the extent of Merrill Lynch’s responsibility for the demise of the Orange County treasury,” Wiechert said.

Capizzi was out of state and couldn’t be reached for comment.

His chief assistant, Maurice L. Evans, noted that a separate $2-billion county civil suit is still pending against Merrill Lynch, so the total damages are far from paid.

Evans also said Capizzi’s settlement resulted from a review of the grand jury evidence and negotiations initiated by Merrill Lynch.

“It wasn’t based on any earnings of Merrill Lynch,” Evans said.

With revenue from trading, commissions, investment banking and asset management all higher, Merrill Lynch’s earnings far surpassed analysts’ projections. Its shares rose by $2.38 to close at $66.06 Tuesday in New York Stock Exchange trading.

The $481-million net income was 11% higher than in the April-June quarter in 1996, when it earned $433 million.

For the half year, Merrill Lynch earned $947 million, up 12.3% from $843 million a year earlier and the most ever for a six-month period.

Merrill Lynch Chairman David H. Komansky said the broad range of the company’s businesses had positioned it perfectly to take advantage of the financial bull market that prevailed throughout most of the quarter.

Merrill Lynch employees enjoyed the ride as well. The company said its largest expense category, compensation and benefits, rose 15% to $2 billion in the quarter. The main reason was that more people were getting fatter paychecks tied to profitability, the company said.

In some previous earnings reports, Merrill Lynch had made note of high legal fees that were interpreted as references to Orange County-related defense attempts.

The latest statement contained no such reference, despite the clearly huge expense for a legal team estimated to include at least 50 outside lawyers.

One of them is Robert Morvillo, who led the Merrill Lynch team that negotiated the $30-million settlement. Legal experts say he charges at least $500 an hour, having previously represented clients like Adnan Khashoggi when the Saudi financier was charged with helping former Philippine President Ferdinand E. Marcos engineer a real estate fraud.

Timothy Gilles, a Merrill Lynch spokesman, said the company won’t disclose its Orange County-related legal expenses. County experts say the company is spending at least $3 million a month in the Orange County matter.

However, county officials won’t say exactly how many millions they have spent suing Merrill Lynch and other firms. When the county exited bankruptcy, $50 million was set aside for suits. Bills from the county’s main law firm total more than $13 million, but that includes bankruptcy costs as well as the lawsuits.

Merrill Lynch, Citron’s chief brokerage, was the main source of the interest rate-sensitive securities that were largely responsible for the county’s losses when rates rose sharply in 1994.

The county filed the biggest municipal bankruptcy in history in December 1994.

According to the county’s civil lawsuit, a greed-driven Merrill Lynch persuaded Citron to embark on his strategy of borrowing heavily to invest in the rate-sensitive bonds. The strategy was so risky that it was illegal for taxpayer funds, the county lawsuit contends.

Merrill Lynch has denied any wrongdoing in that case, saying it fully disclosed to Citron the risks he was running and contending the investment decisions were entirely his own.

That civil case is moving slowly ahead, with trial scheduled for September 1998.