Treasurer Asks O.C. to Bond Again With Merrill
Orange County Treasurer John M.W. Moorlach, who first warned about risky investments with Merrill Lynch & Co. before the county’s 1994 financial debacle, said Wednesday he wants to do business again with the giant brokerage firm.
With the ink barely dry on Merrill’s $420-million settlement with the county, Moorlach has boldly requested that the county’s bankruptcy attorneys let him resume doing business with the one-time leader in the California municipal bond market.
“We’re talking about a company that made some egregious judgments, but we’re all human,” said Moorlach, who succeeded Robert L. Citron, the county’s former treasurer-tax collector who served eight months of a one-year jail sentence for illegally diverting interest earnings from fund investors to the county.
“I have made mistakes in my past,” Moorlach said. “I’ve lost money on investments and made errors on misreading certain people. Does that mean I’m no good for the rest of my life? Maybe it means I’m smarter the next time around.”
Lawyers have cautioned him to wait until the settlement is approved in federal court, which could come in two to three months.
But his request, made in writing in mid-June, is generating heated debate in county government, where many see the company as the major contributor to the county’s historic bankruptcy.
“I can’t imagine that when we have so many investment firms to choose from that we would want to go back to the scene of the crime,” said Supervisor William G. Steiner, the only board member who was in office at the time of the financial collapse.
Resuming business with Orange County would be both symbolic and substantive for Merrill, which had been one of the busiest municipal bond issuers in California. Bond experts said such a move is key to the brokerage’s effort to rebuild its credibility--and its once imposing market in the state.
The company saw its ranking as a municipal bond underwriter drop from first to seventh in the state and its market share plunge from 18.4% in 1994 to 6.5% last year, according to Securities Data Co. in Newark, N.J.
“It’s a historic moment even to be contemplating this move after what took place four years ago,” said Mark Baldassare, senior fellow at the Public Policy Institute of California and author of “When Government Fails,” which examined the bankruptcy.
“I think it speaks to the fact that the real meaning of the settlement was that both sides admitted that they had fallen down on the job,” he said.
Moorlach said Wednesday that county investors are being deprived of the highest possible returns by being unable to deal with Merrill. As long as Merrill has settled the suit and the settlement is approved by the court, he said, the company should be able to do business again in Orange County.
The company and county officials anticipated thawed relations when the settlement was announced last month.
“We welcome Mr. Moorlach’s positive comments and we look forward to working again with the county in the future,” spokesman Bill Halldin said from Merrill’s New York City headquarters.
Many Remain Wary
But many county officials immediately criticized the idea, some saying it was akin to dealing with the devil.
“Merrill Lynch is a giant firm that has a lot to offer,” Steiner said. “But Orange County got really burned in terms of the relationship we had with them.”
Supervisor Charles V. Smith said he would be “very reluctant” to work with Merrill so soon. “I don’t think the past wounds have healed,” he said.
Carole Walters, head of the Committees of Correspondence, a taxpayers-rights group formed in the wake of the bankruptcy, said she is strongly opposed to dealing with Merrill Lynch again.
“Using the same people who caused the bankruptcy is crazy,” she said. “How can we trust them now after everything they did to us?”
In 1994, the county’s two investment pools lost $1.64 billion in value, most of it on risky securities bought by Citron through Merrill Lynch. The loss propelled the county into what became the nation’s biggest municipal bankruptcy in history.
The county sued Merrill, claiming that the company and its chief contact, Michael Stamenson, encouraged Citron to make absurdly risky investments that violated the state’s constitution and laws. Merrill fought back, saying Citron, as the elected treasurer, knew exactly what he was buying and understood the risks.
Last month, Merrill agreed to settle the county’s suit by paying $400 million, as well as returning $20 million in frozen county funds. The settlement brought to $620 million the amount of money paid to the county by companies that it claims had roles in the financial disaster.
When the settlement was announced, several bond experts speculated that the Wall Street giant had decided to avoid a long courtroom fight in the hope of gaining back some of the California business it has lost since 1994.
The settlement funds are in a trust account until U.S. District Judge Gary L. Taylor gives his final approval.
Getting the money could take as little as two months, said Bruce Bennett of Hennigan, Mercer & Bennett, the county’s bankruptcy attorneys. Though court approval for the settlement is being sought, the judge could hold a hearing if someone files objections, he said.
“We expect there’s a high probability that Judge Taylor will approve it in 60 to 90 days,” Bennett said.
Transcripts Coming Up
Steiner said his opposition to renewing relations with Merrill Lynch could deepen with the anticipated release in the next few weeks of grand jury transcripts related to Merrill Lynch’s role in the bankruptcy. The transcripts were ordered released after the county’s lawsuit was settled.
“Once these transcripts are released, we will be able to see all the smoking guns that reveal Merrill’s culpability,” Steiner said. “Then, I expect no one in the county will want to do business with them.”
But because of Merrill’s massive size and influence, experts say it’s going to be difficult for the county to shut out the firm forever.
During a trip to Wall Street last month, county officials met with Merrill executives who handle the purchase of municipal bonds. They didn’t meet then with those who underwrite bond sales, the group the county contends led it astray.
Gary Burton, the county’s chief financial officer, said the meeting was designed to inform the bond buyers about the county’s recovery from bankruptcy and was similar to the pitch made to other Wall Street firms.
The county isn’t contemplating a new bond sale for several years, but Burton said Merrill Lynch might be a source for some of those bonds once they are issued.
Despite his willingness to give Merrill new business, Moorlach said he’d never do business with Stamenson, Citron’s chief contact at Merrill. He called Stamenson, who continues to work for Merrill, a “rogue trader.”
Merrill has steadfastly denied that it had done anything wrong in its dealings with Citron.
At the same time he sought approval for working with Merrill, Moorlach also asked if the county could resume business with two other brokerages: CS First Boston, which has settled with the county, and Goldman, Sachs & Co., which is being sued by the Orange County Transportation Authority.
Moorlach currently invests funds for all county agencies as well as Orange County’s 28 school districts, which are required by law to place their investments with the treasurer.
Margie Wakeham, a trustee with the Irvine Unified School District, said she doesn’t object to Moorlach using Merrill Lynch as long as all the investment safeguards established after the bankruptcy are followed.
“I think we need to move on,” Wakeham said. “I think the negative experiences we’ve had have helped us learn valuable lessons.”
* BROKER AGREES TO FINE: Merrill Lynch will pay less than $3 million to settle SEC bankruptcy probe, sources say. D1
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Merrill Returns
Merrill Lynch, ranked among the top three underwriters of municipal bond issues in California throughout the first half of the decade, dropped to seventh following the Orange County bankruptcy in December 1994. Share of statewide market and ranking:
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Market share Ranking 1990 8.4% 2 1991 14.2% 3 1992 7.9% 3 1993 15.0% 1 1994 18.4% 2 1995 16.5% 1 1996 4.5% 7 1997 6.5% 7
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Source: Securities Data Co.
