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SEC to Charge Merrill Lynch Over Bonds

Bankruptcy: Regulators say brokerage didn't reveal risks. Also, county files $120-million suit against Fuji Securities for its role in pool.


Federal securities regulators have told Merrill Lynch & Co. that they intend to charge the giant brokerage with failing to disclose the risky nature of the bonds it supplied to Orange County--money-losing bonds that helped to put the county in bankruptcy nearly two years ago.

The Securities and Exchange Commission sent a so-called Wells notice to the nation's largest securities firm within the last two months, according to lawyers immersed in legal matters involving the county's unprecedented financial failure.

Such a notice is typically a precursor to a lawsuit or administrative action against a company or individual.

The disclosure came a day after lawyers for the county filed a $120-million lawsuit against Fuji Securities Inc. as part of the county's continued assault on brokerages it blames for the collapse of its investment pool.

The county's lawsuit accuses Fuji of selling unsuitable securities to the investment pool managed by then-Treasurer-Tax Collector Robert L. Citron, who pleaded guilty last year to six felonies and will be sentenced next month.

The Wells notice to Merrill Lynch has been expected for nearly a year. Lawyers said last October that the SEC was preparing such notices against the brokerage and a host of others.

In January, the agency followed through, in part, with an action accusing Citron, his former assistant and the county's five supervisors of misleading investigators. Without admitting wrongdoing or paying fines, they later settled by agreeing not to violate federal securities laws in the future.

Neither Merrill Lynch nor the SEC would confirm that the confidential Wells letter was sent. "We are confident that our disclosure [about the riskiness of the bonds] was proper," said Merrill spokesman Timothy Gilles.

The SEC notice alleges that Merrill failed to inform investors that the county's financial status--and its ability to make good on promised returns--hinged on a risky investment strategy, said lawyers interviewed by The Times and by wire services.

The strategy backfired as interest rates rose throughout 1994, causing the county's investment pool to lose $1.64 billion.

In January 1995, the county sued Merrill for $2.4 billion, alleging that the brokerage concocted an exotic investment scheme that broke state law and led to the collapse. Merrill denies the allegations in the suit, which is pending.

In Wednesday's lawsuit against Fuji, the county alleges that the securities firm not only sold it unsuitable securities but loaned it more than $1 billion to purchase those securities.

Mark Prager, an attorney for Fuji, said the suit lacked merit. "Fuji did nothing which would give rise to liability under any legal theory whatsoever," Prager said.

The action against Fuji brings to nine the number of suits county attorneys have filed to recover the investment pool loss, which resulted in the biggest municipal bankruptcy in U.S. history.

Besides Merrill, the others named in lawsuits include auditors KPMG Peat Marwick LLP, bond counsel LeBoeuf Lamb Greene & MacRae, rating agency Standard & Poor's Corp., the Student Loan Marketing Assn., and financial firms Morgan Stanley Group Inc. and Rauscher Pierce Refsnes Inc.

All have denied wrongdoing.

County attorney Michael Swartz said the county filed the lawsuit against Fuji because the firm wanted to challenge the county's underlying theory in the Morgan Stanley suit.

Swartz said county attorneys were considering additional suits against a dozen other firms allegedly involved in the financial collapse.

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