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Bond Group Opposes County in Court

Bankruptcy: Securities underwriters association asks judge to reject key argument in lawsuit against Merrill Lynch.


SANTA ANA — A bond market trade group on Monday asked a judge to reject Orange County's key argument that former Treasurer-Tax Collector Robert L. Citron illegally gambled billions of dollars when he entered into reverse repurchase agreements with Merrill Lynch & Co.

In legal documents, the Public Securities Assn. said the county's position--if successful--could threaten the "integrity and efficiency of the $1.5-trillion repurchase agreement market."

The association's comments were contained in a friend-of-the-court brief filed with U.S. Bankruptcy Judge John E. Ryan, who is hearing the county's $2-billion lawsuit against Merrill Lynch.

The county's suit alleges that Merrill Lynch duped Citron into purchasing risky securities in violation of state law. It also contends that the transactions, particularly reverse repurchase agreements, forced the county to exceed the amount of debt it could legally incur under the state's constitution.

According to the county's lawsuit, Merrill Lynch sold Orange County 68% of the securities in the $21-billion investment portfolio, which included $14 billion bought with borrowed money.

The county used virtually all of this borrowed money to engage in reverse repurchase agreements. In such a transaction, the seller provides both the credit and securities being purchased and agrees to repurchase the same securities for a specified price at a future date.

Merrill Lynch officials have repeatedly denied any wrongdoing. Brokerage officials have insisted that Citron made his own decisions and that he was supported by the county's Board of Supervisors.

In its legal brief, the association said a ruling for the county could also "discourage [securities] dealers from engaging in transactions with" other municipalities.

Merrill Lynch is a prominent member of the trade group, which represents securities firms and banks that underwrite bonds.

County lawyers did not return calls seeking comment.

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