Merrill Lynch to Pay $400 Million to Orange County
Merrill Lynch & Co. agreed Tuesday to pay Orange County $400 million for the Wall Street giant’s role in the largest municipal bankruptcy in U.S. history, ending a bitter legal war that had tainted the brokerage’s reputation.
The payout--the equivalent of about 10 weeks of Merrill’s 1997 profits--is the largest settlement ever for the brokerage. The firm also will return $20 million in county funds that had been frozen by litigation over the $1.64-billion fiasco. Including six other settlements, the county has recovered $621.5 million--about 39% of its bankruptcy losses.
County Treasurer John M.W. Moorlach, who first raised concerns about the county’s investments nine months before the 1994 bankruptcy, said Tuesday that another $200 million or more can be recovered from lawsuits pending against 20 other brokerage, legal and financial firms.
The recoveries are far more than many observers had expected, and white-collar fraud experts said their size shows that the defendants were highly concerned about how a jury might apportion blame for the debacle.
“You can say a $10-million or $20-million settlement is designed to spare the expense and bad publicity of a trial,” said John Coffee, a New York University law professor. “But you can’t say that about a $400-million settlement.”
The county contended that Merrill Lynch duped former county Treasurer Robert L. Citron into placing casino-style bets on interest rates by borrowing billions of dollars to invest in risky securities.
Merrill Lynch officials continued to deny culpability for the losses even as they settled the case, maintaining that they had acted properly and that Citron was a sophisticated investor who charted his own course.
The brokerage said it was settling because of the “substantial costs and distraction of continuing to litigate” the case. “Both the county and we acknowledged there is uncertainty in any legal case,” said Timothy Gilles, a Merrill Lynch spokesman.
On Wall Street, the settlement was a virtual nonevent.
News of the settlement leaked out before trading concluded, and Merrill Lynch’s shares rose 31 cents, to $80.06, in New York Stock Exchange trading.
The company said that it had set aside reserves for the settlement and that the payment “will have no financial impact” on earnings either in the second quarter or for the year. In 1997, Merrill Lynch reported profits of more than $1.9 billion on revenues of nearly $32 billion.
Thomas W. Hayes, the former state treasurer hired by the county to oversee the lawsuit, said Tuesday that he was pleased with the settlement.
“This has been a long and difficult period for the people of Orange County,” Hayes said at an Irvine news conference. “We are very pleased that in a spirit of mutual cooperation we were able to negotiate an end to this lengthy and contentious litigation.”
The first $54 million of the recent settlements will go to school districts that invested with the county, bringing their recovery to 95% of their losses. Most of the rest goes to cities and local agencies that also lost money in the debacle.
Other issues beyond the large sums are involved in the Merrill Lynch settlement. Chief among them are millions of pages of documents, testimony and other evidence gathered by the county that will be destroyed. That could mean that the full story of the events that led to the county’s bankruptcy will never be made public.
Citron said Tuesday that he was not surprised by the settlement, saying that he believes that Merrill Lynch was motivated to keep its actions secret. He said that grand jury testimony in the case was effectively sealed when Merrill Lynch agreed to pay a separate $30-million settlement to end the criminal investigation of the brokerage.
“We don’t think Merrill Lynch wanted released the multi-thousand pages of depositions--not only mine but literally hundreds of other people--for the same reason they settled with the district attorney,” Citron said. “They didn’t want the testimony released.”
Citron won a reputation as a financial genius in the early 1990s, earning huge returns for the county and more than 200 school districts, cities and local agencies that poured money into its investment pools.
That success turned to disaster in 1994, when the Federal Reserve Board raised interest rates sharply and Citron’s investments--essentially huge bets on low rates--plummeted in value. The losses ultimately totaled $1.64 billion.
The bankruptcy caused a political and financial earthquake. The county laid off 580 employees and cut some department budgets by as much as 30%, with social services and health programs being hardest hit.
One county supervisor resigned, and two others faced civil charges for failing to prevent the financial collapse. An appeals court eventually tossed out those charges as well as similar charges against the county auditor-controller.
In the end, only two county officials--Citron and his assistant, Matthew Raabe--spent any time behind bars.
All told, Merrill Lynch grossed $100 million on the Orange County account from 1992 to 1994, county attorney James Mercer said Tuesday, making the county Merrill Lynch’s single largest customer.
The settlement could make other brokerages more cautious in their municipal bond business, said Schroder Wertheim analyst James P. Hanbury. “People will say, ‘If it happened to Merrill, it could happen to anybody,’ ” he said.
William J. Popejoy, the banker called in as an emergency county chief executive in the months after the 1994 bankruptcy, said the settlement appeared to be a good one for the county.
Popejoy said he had tried to negotiate a settlement with top Merrill Lynch executives.
During those talks, which foundered when their existence leaked out, Popejoy said he had been seeking $800 million from Merrill and other firms.
“So as far as how the county is doing, it looks like they’re well on their way to achieving or exceeding what we were seeking four years ago,” Popejoy said.
The size of the settlement met with mixed reaction in the legal and financial communities.
“This is so much less than what the county has been asking for, and it shows that for the most part, it was Citron and the five supervisors who were at fault here,” said Zane B. Mann, publisher of the California Municipal Bond Advisor.
“They were daydreaming to think they were going to get $1 billion, but they said it for political reasons,” he said.
Cashing out of Orange County also makes sense for Merrill Lynch, Mann said.
“Merrill Lynch is probably determined that it will cost $400 million to get back in the good graces of Southern California governments and begin doing underwriting again,” Mann said. “They probably determined it was the price they needed to pay.”
Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, called the settlement “kind of piddly. They were asking for $2 billion.”
But county officials and others applauded the settlement.
“That’s a pretty good result, it’s a big number,” said Orange County Dist. Atty. Mike Capizzi, who accepted the $30 million from Merrill last year to end the county’s criminal investigation.
With more than $600 million in hand and 20 suits still pending, Capizzi said the county appeared well on its way to recovering the nearly $1 billion it borrowed to emerge from bankruptcy.
Supervisor Todd Spitzer, too, called it “an excellent settlement, especially when you consider that that the county had unclean hands in all of this.”
Irvine attorney Ron Rus, who represented several agencies that invested in the county pool, said: “If we can believe what the supervisors told us Merrill was willing to pay at the outset [$500 million], it looks like they ended up where they were two years ago. It’s hard to see where the cities gained anything.”
Moorlach said it would have been nice to collect more. “But putting it in perspective, based on the other lawsuits out there and the total amount lost by the county, it’s probably as good as we were going to get,” he said.
Times staff writers Thomas Mulligan in New York and Shelby Grad in Orange County contributed to this report.
