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O.C. BANKRUPTCY / Closing the Books with Merrill Lynch

How County, Judge and Merrill Settled on $400 Million


In the end, Orange County's multibillion-dollar damage suit against Merrill Lynch & Co. came down to this: How much did the county really lose?

A federal judge figured that the county's investment pool actually lost $900 million--far less than the $1.64 billion loss the county reported after selling off the Wall Street securities that its former treasurer, Robert L. Citron, had purchased, mainly from Merrill Lynch.

Before some of those high-paying securities took a nose dive in 1994, however, the judge calculated that the county's investment pool had banked nearly $800 million in above average earnings.

In toting up its losses, the judge pointedly asked, how could the county ignore its winnings?

Citron, after all, had won a reputation for financial genius with his high-flying investments.

The man doing the arithmetic was U.S. District Judge John G. Davies during mediation sessions between Merrill and the county over the last three weeks in the judge's Los Angeles courtroom.

While the mediation was voluntary and could not have bound either party, it had the effect of bringing clarity and realism to the proceedings.

By halving the amount the county might reasonably expect to recover, even if the county won its case at trial, Davies put pressure on both sides to end their 42-month legal fight through a settlement.

Davies' calculations opened the door for Steve Hammerman, Merrill Lynch's lead attorney, to begin firing increasingly sweeter offers at former state treasurer Thomas W. Hayes, the county's litigation czar.

"When it got to $400 million, I don't think Tom Hayes, acting on behalf of all the bankruptcy participants, felt he could risk doing better at trial," said James W. Mercer, a key member of the county's legal team.

Combined with another $20 million in county money that Merrill had held since the 1994 bankruptcy and was agreeing to return, the county would be getting $420 million--nearly half the $900 million it might have won from a jury. Merrill also agreed to pay $17.1 million to Irvine Ranch Water District to settle a separate lawsuit.


The court-mandated mediation occurred as the county's legal team was rounding third base and feeling good about the prospects of crossing the plate if the trial went forward as scheduled on Sept. 15, said county lawyer J. Michael Hennigan, a veteran securities attorney.

With a $50-million litigation war chest at its disposal, and a new law firm that was virtually created to handle Orange County's bankruptcy woes, Hennigan said the county was ready for battle.

The firm representing the county had been formed by Hennigan and Mercer, two leading trial attorneys in Los Angeles, who were joined by Bruce Bennett after he was named the county's lead bankruptcy attorney.

Despite the arcane investment terms and complex legal issues they would have to present to a jury, "we felt very confident about our case," Hennigan said.

That said, Hennigan said that it would have been dangerous for Hayes "to gamble" that a jury would award Orange County more than the $420 million Merrill was willing to hand over.

California's "comparable fault" laws, said New York University securities law professor John Coffee, apparently also played a role.

He cited a recent case involving a computer firm in Northern California that blamed its bankruptcy on its investment banker. The jury found that the banker was responsible for only 39% of the company's losses.

Mediation gave both Merrill and the county protective cover for the settlement, Coffee said.

"It permits Orange County, which has long said that Merrill Lynch owes it billions in damages, to tell people it went through the mediation and saw the settlement as realistic," he said.

Others said the settlement revealed there were holes in the county's case.

"This is so much less than what the county has been asking for, and it shows that . . . it was Citron and the five supervisors who were at fault here," said Zane B. Mann, publisher of the California Municipal Bond Advisor.


"They were daydreaming to think they were going to get $2 billion, but they said it for political reasons."

Settling also made sense for Merrill Lynch, said Mann, who noted that the brokerage could now begin repairing its tainted image.

And Jon Schotz of Saybrook Capital, who advised the 200 outside agencies and cities that lost money in the investment pool, said, "I love to get the cash and get out of the room."

With the money from Merrill, and what the county expects to recover from the 20 other lawsuits still pending, Schotz said, "we will be at almost 100%. So I think it's a great thing for everybody. A trial would have been very destructive."

For others, the total was not impressive.

Irvine attorney Ron Rus, who represented several pool investors, said, "If we can believe what the supervisors told us Merrill was willing to pay at the outset [around $500 million], it looks like they ended up where they were two years ago. It's hard to see where the cities gained anything."


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