Merrill Agrees to SEC Fines, Sources Say

Merrill Lynch & Co. has agreed to pay less than $3 million in fines to settle an inquiry by federal regulators into the brokerage firm’s role in Orange County’s bankruptcy in 1994, sources said.

The agreement in principle with the Securities and Exchange Commission, which could be signed and announced as early as this week, will conclude the last in a series of investigations and lawsuits against the largest underwriter of bonds related to Orange County’s financial debacle.

Merrill underwrote $600 million in Orange County bonds before the county suffered $1.64 billion in investment losses and filed for bankruptcy in December 1994.

The SEC is expected to charge Merrill, the largest U.S. brokerage, with failing to make sure county disclosure documents adequately told investors about risks involved in buying the municipal bonds, two people with knowledge of the settlement said. The charges also are likely to contend that Merrill’s internal communications between its investment sales and municipal-bond departments were inadequate.

“When the SEC settles for low damages in comparison with the prominence of a case, it typically means they can’t prove more damages,” said James Doty, a former SEC general counsel who now is a partner with the Baker & Botts law firm in Washington.

The SEC is using the settlement to “send a message about the duties of municipal underwriters, which were never completely clear,” he said.

SEC spokesman Chris Ullman and Merrill spokesman Bill Halldin declined comment. The proposed settlement was reported Wednesday in the Wall Street Journal. Merrill shares fell $1.50 to $103.81.

As part of the settlement, Merrill will neither confirm nor deny the allegations. It has argued that Orange County officials wrote the disclosure statement, that Merrill had little opportunity to offer changes, and that the document did highlight investment risks. The brokerage also has noted that bond investors have been repaid in full by Orange County.

The SEC, in agreeing to a relatively modest fine, is taking into account Merrill’s previous agreements to pay more than $400 million to settle various investigations and lawsuits related to its role in Orange County, the sources said.

Another benchmark was Credit Suisse First Boston Corp.’s January settlement with the SEC, in which the firm agreed to pay $800,000 to settle Orange County-related charges similar to those leveled against Merrill.

The SEC had been looking at the roles played by several Merrill executives, including Michael Stamenson, who sold billions of dollars’ worth of securities to the county. The agency decided not to file charges against them, the sources said.

Merrill also agreed in December to pay $1.9 million to settle a securities fraud class-action suit brought on behalf of Orange County bondholders. In June 1997, Merrill agreed to pay $30 million to end the county district attorney’s investigation of its role in the bankruptcy.

Then-Treasurer-Tax Collector Robert L. Citron had followed a strategy of short-term borrowing to buy longer-maturity derivative securities, which was successful in 1992 and 1993 as interest rates dropped. His strategy collapsed in 1994 when rates rose.

Citron pleaded guilty in 1996 to lying about the county’s finances and illegally transferring money between county accounts. He was fined $100,000, placed in a work-release program for a year, ordered to provide 1,000 hours of community service and placed on five years’ probation.

Orange County’s financial picture has brightened recently. Moody’s Investors Service upgraded $1.5 billion of its debt to investment grade in December.