Merrill Lynch Offered O.C. Deal, Papers Show

SANTA ANA —  In a secret effort to settle the county’s bankruptcy-related lawsuit, Wall Street giant Merrill Lynch & Co. in May proposed a deal that would pay bondholders $430 million and give the county an $800-million loan to pay off other creditors, according to documents made public Monday.

The proposal called for Merrill Lynch and other Wall Street firms that did business with the county to craft a plan that would have helped the county repay its debts, the documents show.

But the plan was swiftly rejected by then-county Chief Executive Officer William J. Popejoy, who was instead seeking an outright $1.2-billion payment from Merrill Lynch.

An account of the proposed settlement was contained in confidential notes that Popejoy provided to the Board of Supervisors after negotiations in New York in May with Merrill Lynch Chairman Daniel Tully and company executives. Those notes were made public Monday along with other evidence presented to the grand jury in its investigation of the county’s unprecedented bankruptcy.

Popejoy’s notes are the first indication that Merrill Lynch officials were seriously considering ways to reach an out-of-court settlement.

Merrill Lynch spokesman Timothy Gilles confirmed that top executives met with Popejoy in May. But he said “we responded in no uncertain terms that Merrill Lynch had done nothing wrong, that Orange County was looking for scapegoats, and we did not intend to be held as a scapegoat. Our paying that kind of money [the $1.2-billion demand] was absurd.”

Asked if the brokerage had proposed a deal, Gilles declined to comment.

The county’s $2-billion suit alleges that Merrill Lynch duped former Orange County Treasurer-Tax Collector Robert L. Citron into purchasing risky securities in violation of state law. It also contends that the transactions, particularly so-called reverse repurchase agreements, forced the county to exceed the amount of debt it could legally incur under the state’s constitution.

According to the county’s lawsuit, Merrill Lynch sold Orange County 68% of the securities in the $21-billion investment portfolio, which included $14 billion bought with borrowed money.

In addition to Merrill Lynch, the county has sued its outside auditor, KPMG Peat Marwick, for $3 billion, alleging that the firm failed to warn county leaders about the risks in its ill-fated investment pool. County bankruptcy lawyers are also planning lawsuits against other professionals and Wall Street firms.

But for the past year, the county’s suit against Merrill Lynch has drawn the most attention.

According to his notes, Popejoy told Merrill Lynch’s top in-house lawyer, Steve Hammerman, who accompanied Tully to the meeting on May 17, 1995, that he thought it would take a $1.2-billion payment to settle the case.

Both Tully and Hammerman expressed “strong feeling[s] that such an amount was not justified,” and that other Wall Street firms “should be brought into the discussions.”

When the discussions went nowhere, Popejoy said he was about to leave and thanked the Merrill Lynch executives for their time, saying: “I would have felt badly later if I hadn’t at least tried to start settlement negotiations before our disagreement assumed a life of its own and more fully entered the . . . public arena,” the documents show.

According to Popejoy, Hammerman asked why “a legal disagreement should enter that arena.”

Said Popejoy: “I then picked up a newspaper from the table and said: Orange County news may be on the back pages in [the] New York Times, but in Orange County . . . the bankruptcy was front-page stuff in both major newspapers almost every day.”

Both Tully and Hammerman made comments “indicating Merrill Lynch’s interest to be part of a solution--not because they had done anything wrong--rather to avoid further hardships by the community,” according to Popejoy’s notes.

Tully and Hammerman asked Popejoy to meet later in the day with three high-ranking officials, who later discussed the crafting of the $1.2-billion plan to bail the county out of its financial debacle.