LOS ANGELES - Bondholders imperiled by the bankruptcy of Orange County, Calif., have agreed to settle with Merrill Lynch & Co. and four other investment firms for $3.1 million.
If Orange County Superior Court Judge William F. McDonald approves the settlement in February, the five Wall Street investment houses will be the last defendants to settle bondholders' 1995 lawsuit against 14 firms for their part in the largest municipal bankruptcy in U.S. history. Other defendants, including bond counsel, underwriters, and financial advisers, agreed last year to pay nearly a combined $4.4 million to settle with bondholders, most of which are institutional investors.
But Merrill Lynch's $1.9 million contribution is by far the largest individual payment made by any defendant. Also under the proposed settlement that was filed two weeks ago, Credit Suisse First Boston - which is no longer in the municipals business - has agreed to pay $990,000; former county auditor KPMG Peat Marwick $225,000; Leifer Capital Inc. $30,000; and Fieldman, Rolapp & Associates Inc. $25,000.
Bondholders originally sued in federal court, charging that bond documents failed to disclose the county's risky investment strategy and shaky finances. As a result, they alleged, they overpaid for bonds. The case subsequently was filed in the state courts.
McDonald granted the settlement preliminarily approved on Dec. 12, said Jan Adler, a partner with Milberg, Weiss, Bershad, Hynes & Lerach, the law firm that represents bondholders.
A hearing on final approval in the class action suit has been set for February, he added.
According to the lawsuit, its Chapter 9 bankruptcy filing left Orange County unable to pay interest on $9 billion of bonds it had issued between July 1, 1992, and Dec. 6, 1994. But Bill Halldin, a Merrill Lynch spokesman, said principal and interest have been repaid in full.
"We are confident we would have prevailed in the litigation," Halldin said. "However, as with the other 13 firms that have settled, it made more sense to resolve the case for a reasonable sum than to continue the expense and distraction of further litigation."
But this does not mean the end for Merrill Lynch's legal entanglement with the Orange County bankruptcy.
Prior to the county's Dec. 6, 1994, bankruptcy filing, Merrill Lynch was the primary brokerage firm used by the county's treasurer at the time, Robert L. Citron, whose risky investment strategy resulted in losses of more than $1.6 billion. Citron and other county officials have insisted that Merrill Lynch should share some of the blame for selling the county investment pool "improper and illegal" securities.
In January 1995, the county filed a civil fraud suit against Merrill Lynch, seeking more than $2 billion of damages. The lawsuit claimed Merrill Lynch negligently handled government investment accounts managed by Citron. It also alleged the firm failed to advise Citron about the high degree of risk in his investments.
Merrill Lynch counters that Citron was in control of the county's investment strategy, and that the firm had repeatedly cautioned him about volatility in the portfolio.
That legal action - and allegations in the same lawsuit in which the county accuses a "Who's Who" of Wall Street firms - will not be affected by this settlement, said Bruce Bennett, the county's chief bankruptcy counsel and whose firm Hennigan, Mercer & Bennett has represented the county in most of these legal actions.
"The settlement of that (bondholders') case is completely unrelated to the disposition of the civil suit," Bennett said in an interview on Christmas Eve.
Trial in Orange County's civil lawsuit is set to begin Sept. 15, 1998, he said.
Officials at KPMG, Leifer, and Fieldman Rolapp could not be reached for comment late last week.
In a related action, on Dec. 24 U.S. Bankruptcy Court Judge John E. Ryan approved a payment of $27 million to the cities, school systems, and special districts that were not made whole by the bankruptcy resolution, Bennett confirmed Wednesday.
Those funds came from a $30 million Merrill Lynch payment in June to end a criminal investigation into the firm's investment dealings with Orange County.
