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SEC Warns 2 at Merrill Lynch of Possible Charges

Securities: The managing directors reportedly received Wells notices from the agency in relation to O.C.'s bankruptcy.


The Securities and Exchange Commission, reaching high into the upper echelons of the nation's largest brokerage, reportedly has warned two top Merrill Lynch & Co. executives that it is ready to charge them with securities violations stemming from the 1994 collapse of Orange County's investment pool.

Richard M. Fuscone and Robert M. Simonson, two of Merrill's managing directors, received so-called Wells notices from the SEC, according to published reports.

A Wells notice, which Merrill Lynch itself also has received, is a preliminary step to a civil enforcement action and gives targets a chance to argue why they shouldn't be sued.

The notices sent to Merrill and its executives raise the issue of whether the firm adequately disclosed to hundreds of bond investors the high-risk nature of securities whose proceeds were earmarked for the county's investment pool.

Timothy Gilles, a Merrill spokesman, wouldn't confirm the Wall Street Journal report. He said, though, that receipt of a Wells notice doesn't represent a conclusion that wrongdoing occurred or that charges are warranted.

"The risk disclosure on notes underwritten by Merrill Lynch was entirely appropriate and, in fact, was more complete than in other Orange County offerings" underwritten by other investment banks, he said. Accusations that disclosures were inadequate are "unfounded and unfair," he said.

An SEC spokesman said the agency would not "confirm or deny" reports that it had issued Wells notices to Fuscone and Simonson.

As part of its investigation into the Orange County financial debacle, the SEC staff has sent Wells notices to the cities of Irvine and Anaheim and to several local school districts, all of which were pool participants. It also has sent notices to investment banker CS First Boston Corp. and to one of the county's bond lawyers, Jean Costanza, a partner with the law firm of LeBoeuf Lamb Greene & MacRae.

Orange County's $21-billion investment pool crashed in December 1994, as rising interest rates undermined the more complicated and risky securities. The pool lost $1.64 billion, forcing the county into the biggest municipal bankruptcy in U.S. history. The county emerged from bankruptcy in June after paying off bondholders.

Merrill sold the county $14 billion in securities, many of them among the riskiest investments in the county's portfolio. The brokerage also sold securities issued by the county, underwriting a total of $875 million in bonds that the county sold in 1993 and 1994. Altogether, it earned fees totaling $62.4 million from the county for those two years.

Simonson was mainly responsible for the county's sale of a much-criticized $600-million taxable bond issue, the proceeds of which went into the investment pool. The SEC is investigating whether Merrill knew that rising interest rates could damage the pool and whether it failed to provide adequate disclosure to bond buyers about the pool's deteriorating condition.

State and federal regulators also want to know if Merrill was helping to raise that money merely to prop up the investment pool at a time when investment banks like itself were making collateral calls on the pool.

The county has sued Merrill for $2.4 billion, alleging that the firm sold unsuitable securities to the county and concocted an elaborate investment scheme that broke state law and led to the investment pool's collapse.

Merrill denies any wrongdoing, pointing out that it had repeatedly warned that the county was pursuing a highly risky strategy.

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