Funds Safeguarded Until Decision

SANTA ANA — Merrill Lynch and Orange County on Tuesday hammered out an agreement that will safeguard more than $250 million in disputed securities until a federal judge can determine which party owns them.

The agreement also ensures that the county can continue to demand information from Merrill about the fate of another $800 million in assets that Merrill Lynch apparently sold without the county’s permission in early 1994.

The compromise ended a daylong hearing that opened with an unexpected bid by Merrill Lynch to transfer the argument over more than $1 billion in county securities and the county’s $3-billion damage suit against the firm to U.S. District Court in Los Angeles.

U. S. Bankruptcy Judge John E. Ryan approved the agreement that will allow Merrill Lynch time to seek the transfer without hindering the county’s ability to fight for the return of more than $1 billion in assets. A federal judge in Los Angeles is expected to make a ruling about where the legal issues should be decided within the next two weeks.

The firm’s attorneys argued that the county’s damage suit belongs in U.S. District Court, rather than the Bankruptcy Court, because it involves civil issues and questions about interstate commerce.

Merrill Lynch attorney Richard Mescon said he was satisfied with the terms of the agreement which calls for the firm to invest the proceeds of the $250-million sale of county collateral in U.S. treasury bills. In seeking a temporary restraining order against the sale, the county had asked that the sale proceeds be set aside in a special trust account until its dispute with Merrill was settled.

“The county has the protection it sought,” Mescon said.

County attorney J. Michael Hennigan said he too was pleased with the agreement. Because the treasury bills are easily identifiable, the county will be able to track the investments--a key element of the county’s plan to eventually retrieve the value of the securities through its lawsuits.

“I got everything I wanted,” he said. “And you can color me confident that whatever judge finally decides on this will rule in the county’s favor.”

Some attorneys questioned the firm’s motives for wanting to move the case out of Ryan’s Santa Ana courtroom.

County bankruptcy attorney Bruce Bennett said the firm apparently wants another judge “who knows nothing about this issue” to decide the case.

Other attorneys in the courtroom said they believe the firm is concerned that a string of decisions by Ryan that have favored the county indicate that Ryan would side with the county against Merrill Lynch.

Also left undecided by Tuesday’s hearing is the key issue of whether Merrill Lynch sold $800 million in securities early last year without the county’s permission.

Merrill Lynch attorneys said the sales were done “in the normal course of business.”

But county attorneys argued that the firm never had the right to sell the securities, and failed to notify the county of the sale. The county maintained that it had listed the securities in its portfolio for 18 months in reports sent to Merrill Lynch, yet the firm never indicated that they had been sold.

Profits from those sales also belong to the county, Hennigan argued. Furthermore, the original agreement between the county and firm over the securities was illegal, he said, because it resulted in the county’s gambling on interest rates.

“They (Merrill Lynch) have got major problems, because the agreement violated (state) government codes,” he said.

Hennigan said that the illegality of the transactions is the basis for the county’s $3-billion suit.

But Merrill Lynch attorneys said the county has already received all it is owed by the firm except for about $23 million in anticipated profits from the most recent sale of $250 million in securities.

The brokerage cautioned that the county’s legal challenge to the reverse repurchase sales agreement between the county and firm could put “billions of dollars” in similar municipal investment funds at risk in California.