Merrill Closes Book on Orange County
Merrill Lynch & Co., supplier of most of the securities blamed for Orange County’s historic 1994 bankruptcy, settled its last major legal case in the debacle on Monday with no mention of the “F” word it had steadfastly resisted: fraud.
The Securities and Exchange Commission case includes no charges against individuals such as the salesman on the county account, Michael G. Stamenson, who called himself a “Master of the Universe” at maximizing profits to himself and the firm.
Without admitting or denying guilt, Merrill will pay $2 million to settle SEC negligence charges, bringing its total payments in the fiasco to $471 million.
The SEC touted the settlement as one of the largest ever in a negligence case. But critics faulted the agency for failing to bring more serious fraud or recklessness charges, describing the settlement deal as a major victory for Merrill.
The $2 million will go to the federal government, not bankruptcy victims. However, Orange County has done well in recovering losses, recouping $739 million so far from legal, financial and accounting firms. That’s nearly half of the $1.64 billion lost when former Treasurer Robert L. Citron’s bets on low interest rates came up losers.
The SEC, which polices the nation’s stock and bond markets, did not address whether investments provided by Merrill were too risky for taxpayer dollars. That was the central charge in civil lawsuits Merrill previously settled out of court.
Instead, the agency faulted Wall Street’s largest brokerage firm for failing to give enough warning of the county’s high-risk investments to buyers of $875 million in municipal bonds. The securities were issued in 1994 by the county and its flood-control district.
The county’s bankruptcy that year plunged the bonds into default, though investors later were repaid with interest.
Merrill said the disclosure problems were inadvertent. It said Stamenson and high-level officials at the firm who also knew the risks the county was running were unaware that the municipal bond descriptions did not fully reflect Citron’s casino-style strategies.
In addition to paying $2 million, Merrill promised the SEC to maintain safeguards designed to improve communications between the firm’s bond underwriters and its other departments. Those safeguards were imposed in an earlier deal to end a criminal probe by county prosecutors. Merrill paid $30 million as part of that settlement.
Merrill said in a statement that the latest settlement “puts the matter behind us. . . .”
Charges of fraud or recklessness could have tainted the firm’s reputation as it moves to regain its role as the biggest Wall Street player in California’s municipal bond market.
