Merrill Lynch Faces Charges in O.C. Bond Fiasco


Wall Street titan Merrill Lynch & Co. said Tuesday that federal authorities intend to bring civil charges against it for its role in the Orange County financial fiasco that turned into the nation’s biggest municipal bankruptcy.

As the county’s chief investment house, Merrill Lynch helped Orange County sell $875 million in bonds through 1994 when the county’s risky investments were reeling out of control toward losses that ultimately totaled $1.6 billion.

The firm faces charges of negligence by the Securities and Exchange Commission in failing to give sufficient warning about the risky nature of the bonds sold to 25 pension funds, mutual funds and insurers.

The bonds went into default as a result of the bankruptcy, though the investors eventually were repaid in full, with interest.

In a terse disclosure in a recent SEC filing, Merrill Lynch said it believes the enforcement action is “inappropriate” and that it continues to battle the agency over the accusations. A spokesman said Tuesday that the SEC action is still expected, declining further comment.


County officials have been waiting anxiously for the SEC to take some action against Merrill, which had received notice from the agency more than a year ago that the firm was a target of an investigation into the county’s financial debacle.

Supervisor William G. Steiner called the SEC’s likely case against Merrill “one more indication that this was not just [former county Treasurer] Robert Citron’s folly.”

The county is suing Merrill for $2 billion in federal court, alleging that the brokerage induced Citron to make investments so risky that they were illegal for taxpayer funds. Trial is scheduled to begin Sept. 15. The county also has sued more than two dozen other firms.

Last year, the nation’s biggest brokerage paid $30 million to settle an Orange County district attorney’s criminal probe of Merrill’s role in the bankruptcy.

Steiner said the settlement with prosecutors, combined with the expected SEC action, “is a signal that they’re not going to escape their responsibilities.”

Steiner himself and the four other county supervisors, however, also came under harsh criticism by the SEC in the agency’s action against Citron and other county officials. In settling those allegations, Citron and the other county officials agreed not to violate securities laws in the future. They neither admitted nor denied wrongdoing.

Merrill Lynch, which contends the county’s losses should be blamed on Citron, said its management believes the various legal actions will have no “material adverse effect on the financial condition or the results of operations of Merrill Lynch.”

Merrill Lynch turned a profit of $1.9 billion last year.

In related litigation, Merrill and other brokerages, without admitting wrongdoing, also paid $7.55 million to settle civil claims by bond buyers who asserted they were misled.

The SEC so far has sued just one Wall Street firm connected with the Orange County fiasco. C.S. First Boston Corp. paid $870,000 in January to settle charges that it misled investors about the risks of county bonds.

It did not admit any wrongdoing.

The SEC initially sued First Boston on allegations of intentional fraud and recklessness, but later downgraded the accusations to negligence.

Notices of possible SEC charges also went out to numerous former Orange County bond lawyers, financial advisors and investment bankers. One of the bankers, Rauscher Pierce Refsnes Inc., has said it is negotiating a settlement with the SEC.

The SEC also has put the cities of Anaheim and Irvine and four Orange County school boards on notice of possible charges against them. All sold bonds so they could reinvest the proceeds in the county treasury for a chance of making higher profits.

Sources have said previously that the SEC case against First Boston was an easy one because the brokerage made almost no disclosures to bond buyers about the risks of Citron’s investments.

Merrill Lynch said the agency’s case against it alleges only “unintentional violations” of disclosure laws, which indicates that the initial charges are likely to involve negligence and not fraud.

As a public corporation, Merrill Lynch is required in government filings to tell holders of its stocks and bonds about matters of importance to the company. It revealed the imminent SEC action in an annual report, one of the required filings.

Elaine Cacheris, head of the SEC’s office in Los Angeles, wouldn’t comment on the potential case against Merrill. She said, though, that the agency is considering action against other defendants who played a role in issuing bonds.

Zane Mann, publisher of California Municipal Bond Advisor, said he expects that Merrill eventually will settle by “paying a fine without admitting any guilt.”

County officials said it’s unclear what effect a possible SEC action would have on its $2 billion lawsuit against Merrill.