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Merrill Lynch Targeted in O.C. Financial Case

Securities: The firm says the SEC plans to file civil charges, accusing it of negligence for its role in the fiscal fiasco.

March 25, 1998|E. SCOTT RECKARD | TIMES STAFF WRITER

Wall Street titan Merrill Lynch & Co. said Tuesday that federal authorities intend to bring civil charges against it for its role in Orange County's $1.6-billion securities loss.

As the county's chief investment house, Merrill Lynch helped it sell $875 million in bonds as the county was skidding toward bankruptcy in 1994.

The firm faces charges of negligence in failing to give sufficient warning about the risky nature of the bonds sold to the 25 pension funds, mutual funds and insurers. The bonds went into default as a result of the bankruptcy, though the investors eventually were repaid in full, with interest.

In a terse disclosure in a recent SEC filing, Merrill said it believes the enforcement action is inappropriate and that it continues to battle the agency over the accusations. A Merrill spokesman said Tuesday that the SEC action is still expected, declining further comment.

Merrill Lynch, which turned a profit of $1.9 billion last year, previously paid $30 million in a deal with Orange County prosecutors to end a criminal probe of its role in the county's financial debacle. It and other brokerages have also settled charges by bond buyers who asserted they were misled.

Merrill still faces a $2-billion lawsuit by the county, which contends the brokerage induced former county Treasurer Robert L. Citron to make investments so risky that they were illegal for taxpayer funds. Trial is scheduled to begin Sept. 15. Citron and other county officials have settled SEC charges.

Supervisor William G. Steiner called the agency's likely case against Merrill Lynch "one more indication that this was not just Robert Citron's folly."

"When you add to that the $30-million penalty they paid to avoid criminal prosecution and indictment by the grand jury, it is a signal that they're not going to escape their responsibilities," Steiner said.

The SEC so far has sued just one Wall Street firm connected with the Orange County fiasco. The firm, C.S. First Boston Corp., did not admit any wrongdoing in January when it paid $870,000 to settle charges that it misled investors about the risks of county bonds.

The SEC initially sued First Boston, accusing it of intentional fraud and recklessness, but later downgraded the charges to negligence.

Merrill Lynch said the agency's case against it alleges only "unintentional violations" of disclosure laws, signaling charges of negligence and not fraud.

The agency would not comment.

The SEC's action against Merrill Lynch was no surprise, given the First Boston settlement, said Zann Mann, publisher of California Municipal Bond Advisor. He said he expects that Merrill eventually will settle by "paying a fine without admitting any guilt."

Orange County officials said it is unclear what effect a possible SEC action would have on its federal court lawsuit against Merrill.

Times staff writers Esther Schrader and Shelby Grad contributed to this report.

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