Merrill Closes Book on Orange County
Merrill Lynch & Co. agreed Monday to pay federal regulators $2 million to settle charges the giant Wall Street firm misled investors as Orange County careened toward bankruptcy.
The Securities and Exchange Commission accused Merrill, which had sold volatile securities to the county, of failing to give adequate warning to buyers of the county’s municipal bonds about the risks the county treasury was running.
The SEC said it was one of the largest settlements of a negligence case in history. But critics said that Merrill should have been charged with intentional fraud or recklessness and that the brokerage got off lightly.
The SEC 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.
Merrill didn’t admit or deny guilt in settling with the SEC. The deal brings its total payments to $471 million in the financial fiasco.
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, didn’t 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 the investors were later 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 didn’t fully reflect Citron’s casino-style strategies.
The SEC also charged Merrill with failing to disclose that the variable interest on three of the bond offerings was capped at 12%. This was important, the agency said, because some money market funds that bought the bonds were barred from investing in securities whose yields were capped in such a way.
In addition to paying $2 million, Merrill promised the SEC to keep in place safeguards designed to improve communication between the firm’s bond underwriters and its other departments.
