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ORANGE COUNTY'S BANKRUPTCY: THE RAABE VERDICTS

Onlookers in This Trial Likely to Be the Focus of the Next One

Courts: Taking careful notes were attorneys for county and Wall Street giant Merrill Lynch, who will face off in suit over liability for bankruptcy.

May 03, 1997|DAVAN MAHARAJ | TIMES STAFF WRITER

SANTA ANA — Matthew R. Raabe's trial didn't attract many spectators, apart from the handful of well-dressed lawyers who sat in the courtroom day after day, filling their legal tablets with copious notes.

But this trial's spectators will likely become the players in Round 2 of the continuing legal wars arising from Orange County's bankruptcy.

In one row sat an attorney for the county, which is suing about 30 legal, financial and professional firms for more than $2 billion over the losses it incurred on risky Wall Street securities.

In another sat an attorney for Merrill Lynch & Co., the prime target in the county suits.

And among those who sent their own attorneys was Michael G. Stamenson, the Merrill Lynch salesman who sold then-Treasurer Robert L. Citron a large portion of the risky securities that eventually caused a $1.64-billion loss and triggered the largest municipal bankruptcy in the nation's history.

With Raabe's trial ending in convictions of all five felony counts Friday, the civil suit against Merrill Lynch--possibly even a criminal matter--is expected to be the next major item on the bankruptcy-related court docket.

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U.S. District Judge Gary L. Taylor, who is presiding over the county's damage suits, said he is eager to "get this show on the road" and has set Sept. 15, 1998, as the tentative trial date in the Merrill Lynch case. Trial dates for the other suits are yet to be set.

The county blames the bankruptcy more on Merrill Lynch than any of its other lawsuit targets. But the giant Wall Street brokerage firm insists it is blameless, that Citron was a longtime, sophisticated money manager who knew the risky nature of the securities he bought from Merrill Lynch's salesman.

Attorneys for Merrill Lynch and the county have been taking depositions from probable witnesses in the case, including Citron and top executives of Wall Street firms.

But possible action from the county's grand jury could affect the prospects for a civil trial in federal court.

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Several months ago, the district attorney's office began presenting evidence to county grand jurors about the role Merrill Lynch executives played in the Citron-run investment pool, sources have said.

The testimony is part of a criminal investigation dubbed Operation Raging Steer by the district attorney's office. Several California-based Merrill executives who dealt with Citron and other county officials have already or soon will be called to testify before the grand jury.

Transcripts of tape-recorded interviews between county officials and the district attorney's investigators revealed that prosecutors are focusing on Stamenson's dealings with Citron.

Citron, who pleaded guilty to interest skimming and violations of state securities laws, has sought to place some of the blame on Stamenson, for guiding him down the path to bankruptcy by aggressively pushing securities that Citron now sees as unsuitable for a public treasury.

During his testimony in the trial of former Budget Director Ronald S. Rubino, Citron said Stamenson helped him develop the investment strategy that ultimately ended in the county's financial calamity, and was fully aware of the interest-skimming scheme that landed both Citron and Raabe in trouble.

Merrill officials have repeatedly denied that Stamenson knew about any improper activities and have insisted that the brokerage acted in a legal and professional manner in its dealings with Citron.

But Merrill is leaving nothing to chance. The brokerage has hired some of the largest law firms in New York and Los Angeles to repel the county's legal assault. Teams of lawyers including Costa Mesa criminal attorney Paul Seth Meyer, who has been retained by the brokerage, analyze every development in the cases arising from the bankruptcy.

Sources said that if Dist. Atty. Michael R. Capizzi decides to seek indictments, it will likely be for criminal violations of the California Securities Code under sections that deal with disclosure of risks and the suitability of investments.

Alan Bromberg, a professor of securities law at Southern Methodist University in Dallas, has said that if Capizzi decides to seek criminal indictments against Merrill, the brokerage would probably try to push for a comprehensive civil and criminal settlement, adding that "there is good precedent for trying to settle both the civil and criminal prosecutions as comprehensively as you can."

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So far, taxpayers have paid dearly for the district attorney's prosecutions arising from the bankruptcy. Capizzi said that by the end of 1996, his office had spent at least $2.5 million to investigate and prosecute six county officials. In addition, the Board of Supervisors has doled out more than $2 million to defend those charged with bankruptcy-related crimes.

And the county has set aside a special war chest--$50 million--to pay their attorneys doing battle with the Wall Street investment houses and law firms the county blames for its bankruptcy.

Some doubt whether taxpayers really stand to benefit from the legal battles resulting from the bankruptcy.

"Spending all this money appears to be masochistic exercise," said Bruce Whitaker, a spokesman for the Committees of Correspondence, a local activist group. "I don't know what lessons we've learned, other than you can play fast and loose with public finances and not be held accountable."

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