Reaction Mixed to Bankruptcy Accord in O.C.

SANTA ANA — Orange County prosecutors’ decision to accept a record $30-million settlement from Merrill Lynch & Co. for its role in the largest municipal bankruptcy in U.S. history was praised by top officials Thursday as the best possible deal for taxpayers while others accused the county of selling out to Wall Street.

As part of the settlement, Orange County Dist. Atty. Michael R. Capizzi confirmed that he will end the criminal investigation of Merrill Lynch, which sold the county most of the high-risk securities that led to $1.64 billion in trading losses and the county’s financial collapse.

Some legal experts predicted that the settlement would strengthen Merrill Lynch’s hand in Orange County’s pending civil lawsuit against the nation’s largest brokerage. The county is counting on getting $2 billion back.

Capizzi said the settlement was in “everyone’s best interest” after 2 1/2 years of criminal and grand jury investigations into the county’s bankruptcy.

“We got everything we could possibly hope to achieve, and we did it at substantial savings to the taxpayers of Orange County,” Capizzi said at a news conference Thursday.

Merrill Lynch officials issued a statement saying that they too were “pleased that this settlement resolves all issues related to the district attorney’s investigation of the company’s relationship with Orange County. . . .

“We continue to believe we acted properly and professionally in all facets of our relationship with Orange County and have entered into this settlement to resolve this matter in a way that avoids the substantial cost and distraction of protracted litigation,” the Merrill statement said.

Others reacted angrily to the news, insisting that Merrill officials should have been indicted.

“They made some serious errors in judgment that found them in violation of state codes,” said John M.W. Moorlach, Orange County’s current treasurer, who warned county officials of a looming disaster in the county’s investment pool months before the county’s 1994 bankruptcy. “I think Merrill Lynch did what was right for Merrill Lynch.”

“It’s a total sellout,” said attorney David W. Wiechert, who represented former county Treasurer Robert L. Citron against criminal charges brought by Capizzi.

*

Wiechert said the district attorney has vigorously prosecuted six county officials--including his client--who did not make a dime from the county’s financial dealings, yet he “has given Merrill Lynch a pass even though [it] profited more than any other firm from the county’s investment purchases and financing.”

Most of the investments that went sour were purchased from Merrill Lynch, which also underwrote many of the bond sales whose proceeds Citron used to buy high-risk securities.

Members of the Orange County Board of Supervisors and other top officials expressed support for the settlement, which they said would provide the county with an unexpected windfall while sparing taxpayers the expense of a lengthy trial that would produce an uncertain outcome.

“Any time you can get money coming into the county we’re happy,” said Supervisor Jim Silva. “We just don’t want to give the impression that this thing is over, because it’s only beginning. This is just a token payment from Merrill Lynch for the crimes it committed against the county.”

Merrill Lynch, Capizzi and other county officials insisted that the settlement would have no effect on the county’s civil suit.

But some legal experts disagreed and said that Merrill Lynch benefited more from the settlement because the brokerage is now free of the threat of criminal indictments or civil complaints from a grand jury.

“It strengthens Merrill Lynch’s hand in the civil litigation with Orange County,” said Geoffrey Miller, a professor of commercial law at New York University.

Miller said the firm “now has the ability to claim that this is just a matter of dollars. . . . By cutting off the most damaging kinds of possible charges, that is the criminal charges, Merrill Lynch doesn’t face the . . . potentially adverse publicity.”

Alan Bromberg, a securities law professor at Southern Methodist University in Dallas, agreed. “It sounds like a very significant victory for Merrill Lynch. Any time you’re out from under a criminal case, you’ve won a victory even though it may have cost you $30 million.”

Bruce Bennett, the Los Angeles attorney leading the county’s litigation against Merrill Lynch, said the $30-million settlement speaks for itself, and does not harm the county’s case.

“I don’t think anyone is in a position to second-guess Mr. Capizzi,” Bennett said. “The size of the fine is a sufficient reflection of the severity of the conduct that was addressed today. Merrill can say they did nothing wrong till they’re blue in the face. Today, they have provided 30 million admissions of responsibility.”

Board of Supervisors Chairman William G. Steiner agreed. “Merrill Lynch said this is not an admission of guilt. But $30 million is a pretty significant penalty.”

Although Merrill Lynch has clearly relieved itself of criminal liability problems that it may have faced from authorities in California, it is still under threat from the U.S. Securities and Exchange Commission. The SEC put Merrill on notice months ago that it could be the target of securities charges related to its Orange County activities.

During Thursday’s news conference, Capizzi turned away questions about whether Merrill Lynch had bought its way out of a criminal indictment.

“That’s not true,” Capizzi said. “I had made no determination as to whether or not there was a chargeable crime. No final decision had been determined about an indictment. . . . That was totally unnecessary based on the resolution of the case.”

About $3 million of the settlement will cover the costs of the district attorney’s investigation, while the remainder will be deposited in the county’s general fund within seven days.

The $27 million would be a windfall to a county that had to slash budgets and lay off more than 500 employees in the wake of the bankruptcy.

Steiner said he would like to see the money distributed to the 28 school districts that lost part of their savings in the bankruptcy as “a good-faith effort to help make them whole.”

The school districts were among the more than 200 government agencies that deposited money in Orange County’s ill-fated investment pool, which suffered $1.64 billion in losses, prompting the county to declare bankruptcy Dec. 6, 1994.

*

Silva said the settlement money must be deposited in the county’s general fund, but that he too would consider providing some funding to the schools. “The schools should be represented at the table,” he said. “I would want to make sure that the schools are adequately represented.”

Supervisor Charles V. Smith said the $27 million should stay with the county to address its needs. Smith said the schools are first in line to receive any proceeds if the county is successful in civil litigation against Merrill Lynch and others.

Before focusing the investigative efforts on Merrill Lynch in an operation dubbed “Operation Raging Bull,” Capizzi’s prosecutors had concentrated on gathering evidence of possible wrongdoing by county officials.

In December 1995, prosecutors persuaded the Orange County Grand Jury to issue civil accusations charging county Supervisors Steiner and Roger R. Stanton and Auditor-Controller Steven E. Lewis with willful misconduct in office for failing to properly oversee the activities of Citron, the former treasurer.

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

That same grand jury also indicted former county Assistant Treasurer Matthew R. Raabe on six counts of securities fraud and misappropriation of funds. Raabe was convicted in April and is now the subject of a pre-sentence evaluation at a California Department of Corrections facility. He faces as much as 13 years in prison when he is sentenced this summer.

Also indicted was former county budget Director Ronald S. Rubino on charges of 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 a felony charge of falsifying a public record.

Citron, the elected treasurer who handled most of the multibillion-dollar dealings with Merrill Lynch, pleaded guilty in April 1995 to the same felony charges Raabe faced.

After agreeing to cooperate with prosecutors and testify against Raabe, his former assistant, Citron was sentenced to a year in County Jail and ordered to pay a $100,000 fine. He is serving the sentence in a work release program that allows him to spend his nights at home.

Also contributing to this report were Times staff writers Lee Romney, E. Scott Reckard, Debora Vrana, Martin Miller, Scott Martelle, Nick Anderson, James S. Granelli and researchers Shelia A. Kern and Lois Hooker.

* IMAGE WORRIES

Settlement removes huge cloud from Merrill. D1