SEC to Continue Probe, but 2 Top Officials in Clear

The Securities and Exchange Commission won’t press civil charges against two high-ranking Merrill Lynch & Co. executives but will pursue its investigation into the company’s role in the Orange County bankruptcy, sources said Thursday.

The decision not to proceed against Merrill managing directors Richard M. Fuscone and Robert M. Simonson was not connected to Thursday’s announcement that Orange County would not seek criminal charges against the company, the sources said.

It was unclear why the agency declined to pursue the Merrill executives.

However, several sources said, the SEC is still investigating the brokerage and other employees, including Michael G. Stamenson, who sold the county billions of dollars worth of risky securities.

The SEC investigation is focusing on alleged failures to disclose the high-risk nature of securities and borrowings in Orange County’s $20.5-billion investment pool. Losses of $1.64 billion in the pool led to the nation’s biggest municipal bankruptcy.

Neither the agency nor Merrill executives would comment publicly about the SEC investigation. The SEC declined to discuss when the process would conclude.

The county settlement sets the tone for other legal actions against Merrill and others involved in the county’s debacle. Lawyers involved in actions stemming from the bankruptcy say the settlement should spur the SEC into action against Merrill.

“This means the SEC will have to do something,” one said. “Given the size of the settlement, you have to accept that there is sufficient evidence for the SEC to act relatively soon.”

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Everyone has substantially the same evidence, he said, and SEC lawyers “aren’t going to watch [Dist. Atty. Michael R.] Capizzi pocket $30 million for the county and then do nothing.”

David W. Wiechert of Costa Mesa, attorney for former Orange County Treasurer-Tax Collector Robert L. Citron, finds it “unfathomable” that the agency hasn’t filed any complaint yet against Merrill.

Wiechert has portrayed Citron, the county’s chief investment strategist who was convicted of fraud in the county’s financial fiasco, as a patsy for Merrill Lynch’s aggressive sales force.

“It is more than two years after the bankruptcy and the SEC has only brought one proceeding against a broker, a firm that was one of the least involved in the county’s finances,” Wiechert said.

“If the SEC expects to be viewed by the public and Wall Street as a credible law enforcement agency,” he said, “it must act far more effectively and expeditiously, even if it means all-out war with finance professionals who have virtually unlimited resources to defend themselves.”

However, Sam Gruenbaum, a Los Angeles lawyer and former SEC enforcement attorney, doesn’t think the county settlement will change the SEC’s course. If anything, he said, “it may indicate some willingness by Merrill to settle with the SEC.”

The evidence that has been gathered so far apparently hasn’t cried out for criminal prosecution, says one source who was sympathetic to Merrill’s side.

“The county has had 1 1/2 years of discovery in the criminal investigation,” he said. “They must be lacking something if they can’t put a case together in that time.”

The county also has filed a $2.4-billion civil lawsuit against Merrill and others. That litigation is proceeding on its own course toward a September 1998 trial date.

But the civil case is far different from the SEC investigation. While the SEC is focused on alleged failures to disclose information to investors buying county bonds, the civil suit centers on securities that Merrill Lynch sold to the county for its investment pool.

The civil suit alleges that Merrill sold the county complex, esoteric securities that were unsuitable for a municipal entity, and that the company concocted an elaborate investment scheme that broke state law and led to the investment pool’s collapse.

Wiechert criticized the SEC’s approach in its investigation.

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“One of the most perplexing aspects of the SEC’s activities to date is its total lack of focus on the suitability of securities sold to Orange County prior to the bankruptcy,” Wiechert said.

Merrill Lynch denies the allegations in the county’s civil action.

“We dispute that the securities were complex and esoteric. They were high-quality, highly rated securities,” said Merrill spokesman Timothy Gilles. “And we didn’t concoct the investment strategy. It was Citron’s plan.”

Gilles asserted that any problems in the portfolio didn’t lead to the bankruptcy because “the bankruptcy was not necessary and was ill-advised.”

Times staff writer Debora Vrana contributed to this report.