LOS ANGELES - Legal pressures against Merrill Lynch & Co. mounted yesterday as federal investigators broadened their investigation into the firm's role in the Orange County investment pool fiasco.
The Securities and Exchange Commission and other federal investigators are examining several aspects of the financial disaster, including the contributions made by Merrill Lynch employees to Robert L. Citron, who resigned as treasurer-tax collector on Dec. 4, four days after the county's investment pool losses were first revealed.
The SEC late Wednesday faxed subpoena's to all five members of the Orange County board of supervisors, a spokesman for board chairman Thomas Riley said yesterday. Supervisors reportedly were asked to turn over by Dec. 29 all documents "relating to communications" with Merrill Lynch.
The Riley spokesman said county counsel has declined media requests to furnish copies of the subpoenas. He added that he could not confirm reports that the subpoenas asked specifically about the supervisors' dealings with Merrill Lynch brokers Michael Stamenson, Debra Harris, and Duane Canaga.
Reached yesterday, Richard T. Silverman, a Merrill Lynch spokesman said, "We're confident that Merrill Lynch acted professionally and properly in all its business dealings with Orange County."
Riley's spokesman and Silverman said they had no comment on speculation that Orange County is planning to sue Merrill Lynch. "We have no information on the intentions of legal action with regard to Orange County," Silverman said.
As previously disclosed, the SEC also subpoenaed records of Rauscher Pierce Refsnes Inc. late last week. Both Merrill Lynch and Rauscher Pierce had served as underwriters on several recent Orange County issues whose proceeds were placed in the county investment pool.
In a related development, federal agents reportedly subpoenaed records of Leifer Capital Inc., a Santa Monica, Calif., independent financial advisory firm that has worked closely with Citron over several years.
Leifer president Jeffrey Leifer did not return phone calls, but the firm issued a statement: "The focus of our activities has always been to assist in achieving appropriate borrowing rates for our clients. We do not involve ourselves in the investment decisions and activities of our clients' treasury pools, and Orange County is no exception."
In other developments:
* Standard & Poor's Corp. said the county has developed a plan to distribute proceeds that are derived from the pool liquidation efforts. The liquidation got under way yesterday when county financial adviser Salomon Brothers sold about $483 million principal amount of fixed-rate, non-structured agency securities in the pool.
"Each investor will receive the lesser of 30% of their deposit or an amount that equals their critical needs," the rating agency said. Critical needs are defined as moneys needed to meet payroll, as well as emergency medical and safety services, through December.
"Payment of debt service on obligations of any pool investor is not considered a critical priority," Standard & Poor's said.
The rating agency said the ultimate distribution formula for the liquidated funds would be decided by a committee of pool investors. The county is hoping the committee will submit its plan to the bankruptcy court within two or three weeks.
* Orange County said late Wednesday it has hired two firms - Hawkins, Delafield & Wood and Squire, Sanders & Dempsey - as special counsel to assist it on legal issues.
The bond counsel firms will help the county determine payment priorities of outstanding obligations, a county press release said.
They will assess how the county's bankruptcy filing will affect its debt, and work to ensure that the county's bonds retain their tax-exempt status. In addition, the firms will assist the county's bankruptcy counsel in dealing with outside agencies that invested in the investment fund.
The firms also will assist the county in working with investors affected by the filing, including bond trustees and their counsel.
Hawkins, Delafield & Wood worked on financial problems with Bridgeport, Conn., and with New York City in 1975. Squire, Sanders & Dempsey worked with Cuyahoga, Ohio, on its financial problems.
* Moody's Investors Service on Wednesday said it is unclear how the county's bankruptcy filing will impact the county's ability to make payments on two long-term obligations with a Jan. 1 interest payment date.
County officials told Moody's that they are "making all efforts" to meet the debt service on two separate issues - certificates of participation issued in 1986 and county improvement general obligation bonds whose issuance date was not specified.
However, the county said "it is unlikely" it would be able to meet its deadline yesterday to transfer $488,175 in interest to the COPs trustee.
Separately, Moody's late Wednesday revised its list of ratings related to the Orange County pool participants.
The agency added 14 ratings that it said have been placed under review. The agency said these ratings were not included on an initial list, released Dec. 6, of pool participants under review. That list identified 110 ratings by Moody's of 58 issuers with funds invested in the pool.
Moody's also deleted 16 ratings that were on the Dec. 6 list. Those ratings were removed after Moody's determined that the agencies had no funds invested in the pool, or that the bonds were called, matured, or refunded.
The additions and deletions were "based on more complete, information about which debt issues are, or are not, in the pool," said Moody's assistant vice president Nicole Johnson.
Moody's rates $3.8 billion of pool participants's debt. That figure includes $1.8 billion of debt invested by Orange County, and $2 billion of debt issued by local agencies.
Following the county's bankruptcy, Moody's suspended its debt ratings for Orange County, but continues to review the ratings of all other pool participants, Johnson said.
"It is not clear when we will finish the review," Johnson said. "We are gathering the information." On Dec. 6, Moody's placed under review 110 ratings of 58 issuers with funds in the pool.
* In related news stemming from the Orange County crisis, Fitch Investors Service said it has analyzed the investment pools of three California counties - Riverside, San Bernardino, and Napa - and concluded that "each of the county's investment pools presently are well managed."
As a result, Fitch said it does not expect to change its short- or long-term ratings on the counties' securities.
San Bernardino County's investment pool totals $2.4 billion, with $753 million in assets subject to reverse repurchase agreements, Fitch said. The county said it will reduce the amount of reverse repos to 10% to 15%.
Fitch said Riverside County's $1 billion investment pool invests only $15 million in derivative securities, and includes only $111 million belonging to voluntary investors.
The rating agency said Napa County's $114 million portfolio is invested conservatively, and only $7 million is invested in derivative securities.
Fitch identified the factors that are important in analyzing a county's potential exposure to illiquidity. They are investment composition, particularly derivatives, leveraging, and the presence of voluntary participants in the investment pool.
