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As Bond Sales Begin, Complexity of Orange County’s Mess Becomes Apparent With PM-Orange

December 15, 1994

As Bond Sales Begin, Complexity of Orange County’s Mess Becomes Apparent With PM-Orange County-Image, PM-Orange County-Interest Rates

SANTA ANA, Calif. (AP) _ The Securities and Exchange Commission broadened its investigation into the Orange County financial crisis, issuing subpoenas for records of the county Board of Supervisors, an official said today.

The SEC, the federal agency that oversees the nation’s financial markets, has been probing the role of Merrill Lynch & Co. and its brokers in the $2 billion investment-fund loss that prompted the wealthy Southern California county to seek bankruptcy protection.

″I can confirm that records have been supoened,″ county spokeswoman Sandy Sternberg said, declining to elaborate. ″We’ve been asked not to discuss it by the SEC.″

Merrill has vigorously denied any wrongdoing in the matter, but said it is cooperating with the SEC investigation. There’s been considerable controversy about the relationship between Robert L. Citron, the ousted county treasurer, and Merrill, which conducted a substantial amount of business for the county.

Since July, Merrill has served as lead underwriter on $775 million worth of municipal bonds for the county.

The Los Angeles Times, which first reported the subpoenas in today’s editions, said the SEC is focusing on communications and dealings between county officials and three Merrill brokers.

The investgation is proceeding as the county’s special financial advisers take steps to restructure the failed investment pool.

Former state Treasurer Thomas Hayes, called in to help the county clean up the wreckage of the failed fund, said Wednesday that the first $1 billion of investments to be auctioned off would be fixed-rate, non-structured securities.

Those are among the least risky securities remaining in the county’s portfolio. But the investments, known as derivatives, are so volatile that a 1 percent increase in interest rates would add $300 million to the county’s losses.

The goal: trade those and other interest-rate-sensitive bonds for ″plain vanilla″ securities with six-month maturities and the safety of a money- market fund.

As the county worked to shore up its investments, the fallout from the financial crisis triggered its first job losses when the Saddleback Unified School District told 47 custodians, clerks and classroom aides that Friday would be their last day.

″They are all casualties from this, no doubt about it,″ Superintendent Peter Hartman said Wednesday.

A federal judge, meanwhile, approved normal banking services between the county and Bank of America, a move that should help the county move toward stability.

Among other things, the ruling will allow $16.4 million in payroll checks to be deposited automatically in employee accounts on Friday.

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