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Orange County to Merrill: We Still Blame You for Bankruptcy

Orange County to Merrill: We Still Blame You for Bankruptcy But we forgive Salomon, Lehman and J.P. Morgan

It seems that Orange County, California, still holds a grudge against Merrill Lynch. This afternoon, Orange County Board of Supervisors voted unanimously not to resume business with Merrill Lynch.

The county apparently still blames Merrill for sending it into bankruptcy in 1994. This is despite Merrill’s settlement with the county in 1998 in which Merrill paid Orange County $400 million to settle accusations that it sold inappropriate and risky investments to former county treasurer Robert Citron. Citron lost $1.69 billion, which forced the county to file for bankruptcy in December 1994. The county sued a dozen or more securities companies, advisors and accountants, but Merrill settled without admitting guilt in June 1998. The county was able to recover about $600 million in total (including the $400 million from Merrill).

The board voted unanimously in a 5-0 tally today to continue to keep Merrill off of its approved list. The board also voted to require board approval for any investments brought from Merrill.

A Merrill spokesman responded, “We remain interested in doing business with the county in the future. We think we can add to the competitive mix and benefit the county financially through various products and services.''

What’s interesting is that the current county treasurer, John Moorlach, wanted permission to do business with Merrill because it would save the county money, he said. Based on lower bids available via Merrill, the county has paid an estimated $4 million more in fees over the last five years, Moorlach said.

Moorlach recommended to the board that Merrill be allowed to broker county investments, even going as far as to write in a memo to board members dated Aug. 12, 2002, “My stance on Merrill Lynch has been very public for more than four years: We need to have access to Merrill Lynch’s money market desk.”

But Orange County Supervisor James Silva said he doesn’t want anything to do with Merrill.

According to board officials, Merrill approached county officials recently with the hire of a muni bond team from Goldman Sachs, which had had a relationship with the county before joining Merrill. In fact, according to the county, after the bankruptcy in ‘94, the county worked with a municipal bond financial team from Goldman Sachs to climb out from the financial rubble. It’s that muni bond team (or at least some members of that team) that is now with Merrill. One muni team member reportedly visited a county toll road meeting several weeks ago. That’s when the subject came up about allowing Merrill back in the game. But county supervisor Todd Spitzer (no relation to New York attorney general Eliot Spitzer) immediately rejected the idea.

Moorlach wrote in his memo to board members that, “Supervisor [Todd] Spitzer and the rest of the Board of Supervisors agreed to a restoration effort in the county’s relationship with Merrill Lynch by agreeing to the settlement.”

In his letter to the board, Moorlach referred to a Los Angeles Times’ June 3, 1998 story in which the paper wrote, “In a statement, the county stressed that the settlement with Merrill ‘ends their adversarial relationship’ and suggested that Merrill, the county and the other investors in the treasury might be able to have ‘constructive relationships’ in the future.”

Supervisor Spitzer said late today, "The bar needs to be set a lot higher when it comes to Merrill Lynch because of their history in the county and the serious ethical problems confronting them nationally."

Moorlach went on to write in his letter to the board that not using Merrill is costing the county “$800,000 on our portfolios each year.” He wrote, “…it is clear we are paying a premium with other broker/dealers to the tune of two basis points.”

Moorlach even slammed some of the Wall Street’s top firms, writing, “Salomon Smith Barney handles a large portion of our trades. Smith Barney was a litigant pursued by the county [after the bankruptcy]. Also, as a subsidiary of Citigroup (also a litigant pursued by the county), they are implicated as complicit with respect to the Enron malfeasance activities. Ironically, a key staff member of the CS First Boston (a famous litigant pursued by the county) is now the lead for the Transportation Corridor Agencies recent bonding activities. But, if the county wishes to hold grudges, this one can easily be transferred. Since Salomon recently settled a lawsuit brought by the county of San Bernardino, we could easily carry our brethren’s animosities and discontinue utilizing Salomon.

“Our second most utilized broker/dealer is Lehman Brothers. They were also pursued by the county in bankruptcy related litigation. The largest number of trades in the last five years were done with J.P. Morgan. But they have been sullied by their involvement, along with Citigroup, with Enron,” Moorlach wrote.

“Where do we draw the line? Every major brokerage firm employs individuals who have made willfully negligent acts that have rendered their employers with penalties and harsh headlines.”

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