A Lesson in O.C. Bankruptcy
Orange County’s disastrous bankruptcy produced its share of colorful characters, including former Treasurer-Tax Collector Robert L. Citron, who dabbled in arcane financial instruments and consulted an astrologer, and the institutional broker who sold him securities, Michael Stamenson. There was also the charismatic William J. Popejoy, banker turned recovery czar. Now, two years after the county emerged from bankruptcy, the last act is being played out by the lawyers, prodded to settlement by a federal judge this week in a big civil case.
The mediation effort produced a $437-million payday for the county from Merrill Lynch, its former principal investment banker. Merrill, which previously paid a $30-million fine to avoid criminal prosecution, maintained it did nothing wrong and that it set aside the money to get rid of what simply had become a costly distraction. The county, which claimed Citron was duped into investment bets by Merrill, took a settlement that was less than it sought. U.S. District Judge John G. Davis had calculated that the actual loss was smaller than the county stated.
More important than any assessment of winners and losers is the warning that this case carries to those who do investment business with government and to all in government with fiduciary responsibility. Had this case gone to trial, a jury would have been asked to weigh the simple concept that there is something especially sacrosanct about public money. It is so important, the county said, that investment counselors have a special obligation to guard against losses, even when negligence is evident on the part of the municipality.
Negligence there clearly was, on Orange County’s part. We know also that there was an internal debate at Merrill Lynch about its risky dealings with Citron; we would know more if depositions in the case, now under court orders to remain secret, eventually were made public as they should be.
This case is not a fully drawn tale of greed on Wall Street and incompetence on Main Street, but the lessons are clear enough. The quality of public servants may vary , but the diligence of investment advisors should be steady. If anyone forgets, Orange County’s $400-million reminder should jog their memory.
