O.C. Halting Probe of Brokerage

SANTA ANA — The Orange County district attorney has agreed to drop his 2 1/2-year criminal investigation of Merrill Lynch & Co.’s role in the county’s historic bankruptcy in return for a payment of what amounts to a fine exceeding $20 million, sources said Wednesday.

The Wall Street giant will admit no wrongdoing in agreeing to the settlement, which could be announced as early as 11 a.m. today, according to several sources who spoke on condition they not be identified.

Settlement of the criminal investigation will have no legal effect on the county’s $2-billion civil damage suit against Merrill Lynch, which is still pending in U.S. District Court.

Dist. Atty. Michael R. Capizzi could not be reached for comment, and his chief assistant, Maurice L. Evans, said late Wednesday: “I can’t comment on that.”

Reached at his New York home Wednesday night, Merrill Lynch spokesman Timothy J. Gilles would neither confirm nor deny that a settlement had been reached. “No comment” is all Gilles would say.

The exact terms of the settlement, beyond the denial of guilt and the payment of more than $20 million by Merrill, were not immediately available. The amount far exceeds the $2.5 million that Capizzi said his office had spent through December on the investigation.

Lawyers representing Merrill Lynch have been closeted in tense negotiations with ranking members of Capizzi’s staff since late last week, and talks almost collapsed earlier this week.

“Merrill Lynch obviously wanted to avoid an indictment,” one source said, adding that Capizzi’s prosecutors had paraded numerous Merrill executives before an Orange County Grand Jury that had been expected to weigh an indictment request before the close of its term 11 days from today.

When talks hit the rough spot earlier this week, plans were made to subpoena more Merrill executives to appear before the grand jury, said one source familiar with the negotiations.

“There were a number of difficult issues still to be resolved,” said another source familiar with the investigation. “This was by no means easy to accomplish.”

But the deal finally came together Wednesday, the sources said, and it would certainly spare the giant brokerage firm from further negative publicity that could have resulted from grand jury action.

By settling the case before any indictments could be issued, more than 5,000 pages of grand jury testimony by Merrill executives and officials of other municipal finance firms will remain forever sealed from the media and the public.

The agreement effectively ends the county’s criminal investigation against Merrill Lynch and its executives. It is unclear whether the district attorney’s office would continue to pursue cases against other financial firms when a new grand jury is impaneled next month.

The county district attorney’s often controversial investigation was launched only days after the county filed the largest municipal bankruptcy ever on Dec. 6, 1994.

The yearlong term of the grand jury sitting at the time of the bankruptcy was extended by six months so that those grand jurors could hear the entire first phase of the case, which focused primarily on county officials.

In December 1995, days before that panel’s term ended, it issued civil accusations charging County Supervisors Roger R. Stanton and William G. Steiner and Auditor-Controller Steve E. Lewis with willful misconduct in office for failing to properly oversee former Treasurer-Tax Collector Robert L. Citron.

The charges against Stanton and Steiner were eventually thrown out by an appellate court, and the district attorney’s appeal to the California Supreme Court did not succeed.

That same Orange County Grand Jury also indicted former Assistant Treasurer Matthew R. Raabe on six counts of securities fraud and misappropriation of funds. Raabe was convicted in April and is currently being examined by the California Department of Corrections, prior to his sentencing later this summer.

Also indicted was former Budget Director Ronald S. Rubino for aiding and abetting a scheme to divert money from the county’s investment pool. Rubino’s trial ended in a hung jury, with jurors deadlocked 9 to 3 in favor of acquittal. He later pleaded no contest to falsifying a public record.

Citron, who handled most of the multibillion-dollar dealings with Merrill Lynch, pleaded guilty to the same felony charges as Raabe in April 1995, and was later sentenced to serve a year in county jail and pay a $100,000 fine. He is serving his sentence in a jail work-release program that allows him to spend his nights at home.

When the current grand jury began its 18-month term, prosecutors were said to be exploring several aspects of the relationship between Merrill Lynch and Orange County, including the suitability of the exotic securities it sold to the county and whether proper disclosures were made to the buyers of Orange County bonds the firm underwrote.

The liquidation of the county’s $21-billion investment pool after the bankruptcy forced the county to swallow $1.64 billion in losses, mostly on securities that Citron had bought from Merrill Lynch.

Merrill Lynch also underwrote the lion’s share of the Orange County bonds whose proceeds were used for speculative Wall Street investments. In the past, Merrill has steadfastly denied that it did anything wrong, and it is vigorously defending against the civil damage suit the county filed in federal court on Jan. 12, 1995.

Since late last year, several Merrill Lynch executives and officials with other municipal finance firms have appeared before grand jurors as a part of an investigation dubbed “Operation Raging Steer” by the district attorney’s office--a sardonic reference to the large bull that appears prominently in the firm’s advertising and logo.

Grand jurors had been expected to hear from Michael G. Stamenson, the Merrill Lynch super-salesman whose close working relationship with Citron led the county to purchase increasingly riskier securities and to borrow twice the value of the $7-billion pool to make more investments.

Also scheduled to testify were Robert M. Simonson, a managing director and one of Merrill’s top securities traders, and Richard M. Fuscone, another managing director, who was in charge of the firm’s fixed income securities group.

Merrill still faces an investigation by the U.S. Securities and Exchange Commission in connection with the bankruptcy.