But one of Merrill top executives believed Falzon crossed the line when he cast off $200 million worth of undesirable securities on Citron.
"This trade, in my opinion, was unethical, immoral, and possibly illegal," wrote Michael G. Stamenson in a January 1990 internal memo that was among the newly obtained documents.
Ultimately, Merrill had to buy back the unwanted securities, even though Falzon's successor had vigorously resisted such a move.
When The Times asked Merrill officials to explain Stamenson's outrage, spokesman Bill Halldin immediately read a prepared response.
"There was an internal dispute about the New England [Bank CDs] sale to Orange County that ultimately resulted in Merrill Lynch repurchasing the notes," Halldin said. "This matter underscores how Merrill Lynch and its employees are committed to serving the interest of our clients."
More important, Stamenson's protests to Merrill's top brass strengthened his bond with the treasurer.
The two had actually met under dramatic circumstances during a conference in 1988. Citron, then president of the statewide treasurers association, watched as Stamenson and a lobbyist for Citicorp exchanged blows in a San Mateo hotel lobby. The two men had gotten into an argument over legislation that Citicorp supported, but Citron believed overly loosened municipal investment rules.
Even though he suffered a bloody nose, Stamenson drove Citron to the airport after cleaning himself up in a hotel restroom.
"Public treasurers have no business investing short-term funds in long-term securities," Citron said in a letter of complaint to Citicorp that recounted Stamenson's altercation.
Ironically, both Citron and Stamenson would team up to do exactly what Citron had cautioned against years earlier.
By the early 1990s, Citron had formed a deep bond with Stamenson, phoning him almost daily to discuss investments.
Citron would send Stamenson monthly reports that showed the county's cash balance and how much money was available for investments.
Largely because of his work with the county, Stamenson began raking in record earnings, nearly $3 million in salary and bonuses in 1993 alone.
Citron didn't seem to care that Stamenson had earlier been involved in San Jose's loss of $60 million. In fact, he told a state legislature at the time that "nobody knows more about the San Jose situation that I do."
Bets on Star Charts, Reverse Repurchases
The Orange County treasurer was interested in trying new and ever-riskier types of investments as a way of increasing yields. The extra interest earnings were needed more than ever to help county government avoid massive cutbacks after the state Legislature in the early 1990s reduced the amount of tax revenue county governments received.
Merrill, for its part, was interested in expanding the types of securities it offered municipal investors such as Orange County. With Merrill's backing, Citron was instrumental in pushing through state legislation that allowed counties to invest in reverse repurchase agreements.
To remain one of Merrill's most favored clients, Citron would occasionally use taxpayer funds simply to help out the brokerage. A 1991 audit by the county found that Citron made questionable purchases totaling more than $50 million "at the request of Merrill Lynch, to help the broker meet financial statement ratios required by the Securities & Exchange Commission." County auditors found evidence of a similar transaction in 1990.
Merrill Lynch also came to realize that Citron didn't always rely on standard investment techniques.
For more than a decade, the treasurer used a $4.50 star chart, purchased from an Indianapolis astrologer, to help make investment decisions for the county, as well as for local schools, cities and special districts.
In papers released this week, Citron testified that he told Stamenson, among others, that he would keep the chart in his desk and use it to predict changes in the financial markets. In April 1994, Merrill officials began planning damage control if interest rates continued their upward spiral, and Orange County suffered huge losses on its interest-sensitive portfolio.
Its attorneys kept in reserve a news release defending Citron's record as a treasurer, if questions about his investments began to surface.
"He's has demonstrated that he is an experienced and professional investor fully cognizant of the dynamics of his portfolio."
Six months later, Orange County declared bankruptcy.
Times staff writers Ray F. Herndon and E. Scott Reckard contributed to this report.