Merrill Lynch & Co. agreed Tuesday to pay $437 million to settle its role in Orange County's financial collapse, ending a bitter legal battle by making one of the biggest payouts in Wall Street history.
The settlement equals about 11 weeks of 1997 profits for Merrill, the nation's largest 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 separate suit by the Irvine Ranch Water District.
Including six previous settlements, investors in the county's investment pools have recovered $638.7 million--about 39% of their $1.64 billion in bankruptcy-related losses.
The settlement was spurred by a federal judge who last week signaled that although the county sought $2 billion in its lawsuit, its losses were offset by nearly $800 million in unusually high profits it made before its high risk investments failed.
County Treasurer-Tax Collector John M.W. Moorlach, who as a private citizen first sounded alarms over the county's investments nine months before the December 1994 bankruptcy, said Tuesday that he believes another $200 million or more can be recovered from lawsuits pending against 20 other brokerage, legal and financial firms.
"We're hopeful that we may be able to announce more settlements soon," said county attorney James Mercer Jr.
While the bankruptcy caused a political and financial earthquake in 1994, resulting in hundreds of layoffs and cuts in social services, it has had little effect on most residents of the county, one of the nation's most affluent. The region's economy has created tens of thousands of jobs, boosting incomes and home prices along the way.
Experts said the size of the legal recoveries shows that the defendants were highly concerned about how juries 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 then-county Treasurer Robert L. Citron into placing casino-style bets on interest rates by borrowing billions of dollars to invest in risky securities. They alleged the investments reaped Merrill millions of dollars in extra commissions.
Merrill officials continued to deny culpability for the losses even as they settled the case, maintaining 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.
As part of the settlement, the county also will drop its claims against the Student Loan Marketing Assn., the Federal Home Loan Bank system and several other federally sponsored agencies that issued the derivative securities that Merrill sold to Citron.
A Non-Event on Wall Street
Merrill isn't yet completely clear of the Orange County mess, having said it expects the Securities and Exchange Commission to charge it with negligence in the case. "We're still talking to the SEC," spokesman Bill Halldin said.
On Wall Street, the settlement was a virtual non-event.
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 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 year. In 1997, Merrill reported profits of more than $1.9 billion on revenue 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."
Hayes' agreement with the pool investors called for him to be paid 1.5% of any amount recovered over $200 million, making his cut about $6 million so far.
The settlements, which must be approved in federal court, have increased schools' recovery of losses to 95 cents on the dollar. Most cities and special districts will have recovered more than 90 cents on the dollar, except for a handful that opted out of the county lawsuit to pursue their own claims.