Merrill Lynch & Co. agreed Tuesday to pay $437 million to settle its role in Orange County's financial collapse, the largest municipal bankruptcy in U.S. history.
The payout--the equivalent of about 11 weeks of Merrill's 1997 profits--is the largest settlement ever by Wall Street's biggest brokerage.
It includes $400 million to settle the county's lawsuit, the return of $20 million in county funds that had been frozen and $17 million to settle a suit by an Irvine water district.
Including six previous settlements, the county has recovered $638.7 million--about 39% of its $1.64 billion in bankruptcy losses.
County Treasurer John M.W. Moorlach, who first raised concerns about the county's investments about nine months before the 1994 bankruptcy, said Tuesday that another $200 million or more can be recovered from lawsuits pending against 20 other brokerage, legal and financial firms.
While the bankruptcy caused a political and financial earthquake in 1994, it has had little meaningful effect on most county residents since then. The region's economy has created tens of thousands of jobs, boosting everything from incomes to home prices along the way.
Still, the recoveries are far more than many observers had expected, and white-collar fraud experts said their size shows that the defendants were highly concerned about how a jury might apportion blame for the debacle.
"You can say a $10-million or $20-million settlement is designed to spare the expense and bad publicity of a trial," said John Coffee, a New York University law professor. "But you can't say that about a $400-million settlement."
For Merrill, the payout simply may have been rooted in wanting to boost its business in California, said Zane B. Mann, publisher of the California Municipal Bond Advisor.
Merrill "probably determined that it will cost $400 million to get back in the good graces of Southern California governments and begin doing underwriting again," he said.
The county contended that Merrill duped former county Treasurer Robert L. Citron into placing casino-style bets on interest rates by borrowing billions of dollars to invest in risky securities.
Merrill Lynch officials continued to deny culpability for the losses even as they settled the case, maintaining that they had acted properly and that Citron was a sophisticated investor who charted his own course.
The brokerage said it was settling because of the "substantial costs and distraction of continuing to litigate" the case. "Both the county and we acknowledged there is uncertainty in any legal case," said Timothy Gilles, a Merrill spokesman.
On Wall Street, the settlement was a virtual nonevent.
News of the settlement leaked out before trading concluded, and Merrill's shares rose 31 cents, to $80.06, in New York Stock Exchange trading.
The company said that it had set aside reserves for the settlement and that the payment "will have no financial impact" on earnings either in the second quarter or for the year. In 1997, Merrill reported profits of more than $1.9 billion on revenues of nearly $32 billion.
Thomas W. Hayes, the former state treasurer hired by the county to oversee the lawsuit, said Tuesday that he was pleased with the settlement.
"This has been a long and difficult period for the people of Orange County," Hayes said at an Irvine news conference. "We are very pleased that in a spirit of mutual cooperation we were able to negotiate an end to this lengthy and contentious litigation."
The first $54 million of the recent settlements will go to school districts that invested with the county, bringing their recovery to 95% of their losses. Most of the rest goes to cities and local agencies that also lost money in the debacle.
Other issues beyond the large sums are involved in the Merrill settlement, namely millions of pages of documents, testimony and other evidence gathered by the county that will be destroyed. That could mean the full story of the events that led up to Orange County's bankruptcy will never be made public.
Citron said Tuesday that he was not surprised by the settlement. He said that he believes that Merrill was motivated to try to keep its actions secret. He said that grand jury testimony in the case was effectively sealed when Merrill agreed to pay a separate $30-million settlement to end the criminal investigation of the brokerage.
"We don't think Merrill wanted released the multi-thousand pages of depositions--not only mine but literally hundreds of other people--for the same reason they settled with the district attorney," Citron said. "They didn't want the testimony released."
Citron won a reputation as a financial genius in the early 1990s, earning huge returns for the county and more than 200 schools, cities and local agencies that poured money into its investment pools.