Bankruptcy Foes Now Fighting the Same Battle

Once hostile adversaries, Orange County Dist. Atty. Michael R. Capizzi and Merrill Lynch & Co. now find themselves unlikely allies as they fight to deny public release of 5,000 pages of grand jury transcripts.

For 2 1/2 years, Capizzi’s office and the Wall Street brokerage have sparred over the district attorney’s attempt to assemble evidence that Merrill officials violated state laws as they helped Orange County borrow and gamble itself into bankruptcy.

But the tension dissipated five weeks ago when Merrill Lynch agreed to pay the county $30 million to scuttle a grand jury investigation and any possibility of criminal charges against its officers.

Although Capizzi agreed to the settlement, his announcement said he was convinced that the evidence showed that Merrill had run afoul of state laws.

Now a host of media companies, including The Times, are seeking the public release of the grand jury transcripts--which include testimony by top Merrill officials--to see exactly what Capizzi decided not to prosecute.

Orange County’s own bankruptcy lawyers say they will be hampered--if they don’t get these transcripts--in pursuing their $2-billion damage suit blaming Merrill for the county’s financial collapse.

But in separate court filings this past week, Capizzi and Merrill insist that existing law doesn’t permit release of grand jury testimony, especially when an indictment has not been issued.

“This highly unusual [settlement] deal has made strange bedfellows of the D.A. and Merrill Lynch,” said Robert Pugsley, a professor at Southern University School of Law in Los Angeles.

Law experts say the case raises an important legal issue. When does the public’s right to know outweigh a long-standing tradition to keep some grand jury proceedings secret?

David O. Carter, Orange County’s supervising criminal court judge, could decide this question as early as Wednesday, when he holds a hearing to determine whether the transcripts should be unsealed.

Assistant Dist. Atty. Wallace J. Wade said the judge has little choice but to follow the law.

“The law simply does not permit testimony or evidence to be made public when it is taken in closed, nonpublic sessions,” Wade said in court papers.

Mark Stein, a New York attorney for Merrill, agreed, saying brokerage officials testified before the grand jury “on the understanding that, absent the filing of an indictment, their testimony and statements would forever remain secret . . . [and] were protected by law from release to the public.”

And Richard Marmaro, who represents Michael G. Stamenson, the Merrill broker who sold the county billions of dollars in risky securities, went a step further.

He said the request to unseal the transcripts was “a fishing expedition by the media which offers no benefit other than satiating the idle curiosity of the public.”

Capizzi’s decision to oppose release of the grand jury transcripts conflicted with his earlier promise to make public the sworn testimony of Merrill executives.

Wade said Capizzi simply promised to see if the law would allow prosecutors to release the transcripts.

“The law says releasing these transcripts would have a chilling effect on future proceedings before grand juries,” Wade said in an interview. “We think our duty as officers of the court is to simply tell the court what we believe the law to be.”

For Capizzi, the settlement with Merrill was supposed to give a boost to his campaign for state attorney general next year.

“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 news conference when he announced the settlement. “It was in everybody’s best interest that we reached this resolution.”

But the agreement has been questioned by legal experts and some county officials, including Treasurer-Tax Collector John M.W. Moorlach.

John Coffee, one of the leading experts in securities law and white collar crime in the nation, described the deal as “highly unusual” because Merrill did not have to make the “slightest acknowledgment of responsibility.”

“Every U.S. attorney has the ability to get a civil injunction to settle a fraud case, but you almost never see a criminal case being resolved on a wholly civil basis,” said Coffee, who teaches at Columbia University Law School in New York.

“Because criminal enforcers are in a position to extort a civil settlement out of a defendant if they make the criminal case go away, they find this type of solution an abuse of their powers and an inadequate solution,” Coffee said.

After Capizzi announced the settlement, Coffee and other legal experts opined that the county was surrendering whatever leverage it would have enjoyed had a criminal indictment been brought.

Last week, James Mercer, one of the attorneys leading the county’s fight to recover its more than $1.64 billion in losses, pleaded with Judge Carter to release the documents, saying keeping them sealed would give Merrill an unfair advantage in the county’s suit, which is scheduled for trial before U.S. District Judge Gary L. Taylor in September 1998.

According to Mercer, county lawyers have already taken the pretrial testimony of some 35 Merrill Lynch officials, some of whom “have been unable to recall crucial events,” while others have given “inconsistent” testimony regarding “critical matters,” Mercer said.

The attorney noted that Merrill’s attorneys had obtained nearly 10,000 pages of grand jury transcripts following the indictments of several county officials in December 1995.

“Merrill Lynch has grand jury transcripts with which to impeach county witnesses, but the county has no grand jury transcripts with which to impeach Merrill Lynch witnesses,” Mercer said.

Mercer said the transcripts should be released for other reasons.

“The public need for disclosure . . . is particularly heightened in this case, which arises out of the largest municipal bankruptcy in history and the loss of over $1.6 billion by [the] public,” Mercer said. “The public deserves to understand and be informed of the full course of events leading up to the financial collapse, including both the actions of its public officials and those who acted in concert with them, to determine who bears responsibility and how to ensure that such events do not recur.”

Wade, the assistant district attorney, said local prosecutors could not legally consider the county’s civil suit in reaching their own settlement with Merrill.

“We’re not permitted ethically to consider the impact of our decision on civil litigation,” Wade said. “And we don’t represent the county as such. We represent the people as public prosecutors.”

In their court papers, Wade and Merrill’s attorneys cite a 1988 state Supreme Court decision, McClatchy Newspapers vs. Superior Court, which they say is the “controlling” law in California.

In that case, the court prevented release of “raw evidentiary data” by a grand jury investigating alleged irregularities in Fresno County’s award of a computer service contract.

But Pugsley, the law professor, said the Fresno case was different from the scenario in Orange County. The Fresno case involved the release of “raw evidentiary data”--not transcripts as in Orange County.

In Fresno, the court was concerned about future criminal prosecutions, which is not an issue in Orange County because Merrill has been assured that it will face no future prosecution.

And the Fresno case involved a watchdog grand jury, not a panel contemplating possible criminal charges as in the Orange County case, Pugsley said.

According to Pugsley, the McClatchy case and state criminal laws give Carter “tremendous discretion” to determine whether the transcripts should be released.

“There is a very good public-policy argument for disclosure of these transcripts,” Pugsley said. “This is a rock-solid case where the public [lost] big money and which resulted in the indictment of [county leaders] and a record-setting bankruptcy.

“This is not the stuff of tabloid sensationalism.”