Brokerage Is the Big Winner, Experts Say

SANTA ANA — In the legal chess match between Orange County Dist. Atty. Michael R. Capizzi and Merrill Lynch & Co., the Wall Street brokerage emerged a clear winner Thursday, strengthening its defense against Orange County’s $2-billion civil damage suit, law experts said.

Merrill’s agreement to pay $30 million effectively scuttled Capizzi’s 2 1/2-year criminal investigation. Had prosecutors filed charges and secured convictions against Merrill and its officers, experts say, the brokerage would have been precluded from denying in civil court the same incriminating facts that might have been brought up in a criminal case.

“It’s worth $30 million to not expose yourself to that possibility,” said Frank Lazzano, a former SEC trial lawyer who now represents defendants charged with securities fraud. “It’s a good deal for Merrill Lynch.”

Added Alan Bromberg, a securities law professor at Southern Methodist University in Dallas, “Any time you’re out from under a criminal case, you’ve won a victory even though it may have cost you $30 million.”

A trial of the county’s claims against Merrill is scheduled to begin in September 1998 before U.S. District Judge Gary L. Taylor in Santa Ana.

The county’s suit alleges that Merrill and its top officers duped former Orange County Treasurer-Tax Collector Robert L. Citron into purchasing risky securities. The county also claims that the Wall Street giant knowingly extended credit--to buy those securities--that exceeded limits imposed by the California Constitution.

The county has accumulated $50 million to pay its private attorneys to pursue suits against Merrill and about 20 other brokerages and professional firms the county blames for its financial collapse in December 1994.

Capizzi said the settlement was in the best interests of taxpayers and saved the county the cost of a lengthy trial that probably would have resulted in a fine anyway. He said his action would have no impact on the county’s civil suit.

On Thursday, the county’s lead bankruptcy attorney also downplayed the effect Merrill’s deal with Capizzi would have on the county’s suit.

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It “is not affected in any way,” said attorney Bruce Bennett. The $30 million “is a fine or a penalty, not a form of compensation. The county and its pool participants have not been impaired or affected in any way [by the settlement]. We still expect to prevail in our litigation.”

But Paul Critchlow, Merrill’s chief spokesman, said the brokerage got exactly what it wanted because it no longer has to worry about potentially long and costly criminal proceedings.

“It removes us from the criminal area entirely and puts it back in the civil arena,” said Critchlow. “And that’s where we want it.”

Geoffrey Miller, a professor of commercial law at New York University, said the settlement will lessen Merrill’s troubles as it struggles to deal with the county’s civil suit. The negative publicity of a criminal indictment would have backed Merrill Lynch into a corner, Miller said.

“In the context of very adverse publicity, a corporate defendant that values its customer base is going to do almost anything to make the case go away,” Miller said. “By cutting off the most damaging kinds of possible charges, that is criminal charges, Merrill Lynch doesn’t face the same type of potentially adverse publicity.”

Some experts called the deal between Capizzi and the firm “unusual,” saying the district attorney lost an opportunity to hold Merrill responsible for any questionable action arising from the bankruptcy.

Professor John Coffee, a securities law professor at Columbia University Law School in New York, said Capizzi could have secured a similar hefty fine if he had filed charges against the firm and then entered into a plea bargain.

Because no charges were filed, there is “not the slightest acknowledgment of responsibility,” Coffee said.

“If [prosecutors] generally follow this procedure and take money to drop prosecutions, we’ll have a world where you threaten criminal liability in order to secure large payments but no ultimate resolution of truth or falsity of charges,” Coffee said.

Coffee and other securities law experts said they could not recall any other case where a law enforcement agency had agreed to accept a civil fine to drop an investigation.

Usually such cases involving large securities firms end with civil and criminal settlements occurring at the same time, Coffee and others said.

“The county is surrendering its opportunity to exploit whatever leverage [it] would have had,” Coffee said. “King Solomon can split the baby in half, but prosecutors have to decide whether to go forward and seek an indictment or call off investigations.”

It remained unclear Thursday whether the county’s private lawyers will have access to the testimony of witnesses who appeared before the grand jury in the Merrill investigation.

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Federal law sometimes allows the release of grand jury testimony even if no charges are brought in cases where the material is important to civil litigation. Under state law, however, it can’t be released unless there’s an indictment.

Capizzi said Thursday that nothing in the deal with Merrill Lynch prohibits release of the grand jury proceedings.

“We’re going to explore it under state law and see if there’s any way to get over that hurdle,” Capizzi said. “It’s my intent and desire that it be made public.”

Bromberg, the SMU law professor, said the county would be justified in feeling that it “was sold down the river” if county lawyers are hindered in pursuing the civil case against Merrill.

Bennett, the county’s bankruptcy attorney, said the county never sought to use the district attorney’s investigation as leverage in the civil case.

But he said the deal between Capizzi and Merrill suggested that the brokerage acknowledged some responsibility in the county’s bankruptcy.

Reminded that Merrill denied any wrongdoing in agreeing to pay the fine, Bennett said: “Merrill can say they did nothing wrong till they’re blue in the face. Today they have provided 30 million admissions of responsibility.”

Times staff writer Lee Romney contributed to this report.