The Bankruptcy Papers

Revelation by revelation, the picture of Orange County’s bankruptcy continues to become ever more clear, nearly four years after the stunning fiscal disaster.

Brokerage firms continue to pony up dollars as settlements with the county--all the while denying they did anything wrong. The role of the biggest, Merrill Lynch, also has come into sharper focus with the recent release of transcripts of depositions given when the county sued the company.

Judges rightly rejected attempts to keep the civil case testimony secret. Testimony to the Orange County Grand Jury, which investigated criminal rather than civil wrongdoing, has not yet been released. It should be. Merrill Lynch avoided possible indictment on criminal charges by paying the county $30 million. It also paid the county $420 million to settle the civil lawsuit.

The county filed the nation’s largest municipal bankruptcy after an investment fund lost $1.64 billion. That was public money. It belonged to schools, cities, the county, assorted government agencies.

That public money should have been safeguarded against loss. Instead, the depositions show the opposite happened: The money was used as leverage to borrow more money, which was used to make bigger bets, especially on the direction of interest rates.

The man handling the money was the county’s then-treasurer, Robert L. Citron. After the bankruptcy, he pleaded guilty to falsifying records and violating securities laws, and spent eight months in a jail work release program.

As he did in arguing for a light sentence, Citron contended in depositions that he was mentally impaired when he gambled the public money. He says doctors have diagnosed brain disease that began affecting his judgment several years before the bankruptcy. Unfortunately for the public, no one seemed to notice any problems, and he was none too forthcoming at the time he offered himself for reelection in the spring of 1994. Rather, he basked in the praise of his acumen.

Orange County was Merrill Lynch’s biggest customer. The depositions clearly show brokerage firm officials warned that the county’s investments were too risky. One official even told Citron in person that Merrill’s own funds were invested more conservatively.

But Citron didn’t stop buying risky derivative investments from Merrill, which kept making money by selling them. Nor did Orange County’s Board of Supervisors provide the proper oversight of Citron. Instead, the board happily accepted the extra funds Citron was earning and used them for county programs.

Merrill’s key salesman was Michael Stamenson, who acknowledged in the depositions doing “war dances” after persuading Citron to buy still more investments.

Stamenson also was portrayed as upset with a Merrill colleague who warned the Irvine Ranch Water District about the riskiness of the securities.

The district properly withdrew its funds. Stamenson has never been charged with a crime, has denied any wrongdoing and remains employed by Merrill Lynch.

The man who sounded the warning against Citron’s investments was John M.W. Moorlach. He ran against Citron for treasurer, lost, but wound up as treasurer after Citron was fired. Moorlach now says that while he would not deal with Stamenson, the county should preserve the option at some future point of resuming business with Merrill, considering its importance in the investment world. Obviously, in light of the depositions, any such decision should be made with extreme care.

The bankruptcy caused great pain. County workers were fired; budgets were slashed; good programs were dropped. So far the county has recovered about half the money it lost, but some county operations continue to suffer. The depositions don’t show anyone in a very good light.

But they do portray the need for vigilance in handling the public’s money. Those handling the funds need to be monitored; when things go wrong, elected officials, such as the county supervisors, have to step in.