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SEC Probe Widens, Subpoenas Orange County Records

December 16, 1994

SANTA ANA, Calif. (AP) _ The Securities and Exchange Commission on Thursday broadened its investigation of the nation’s biggest municipal bankruptcy, subpoenaing the Orange County board of supervisors’ records.

The move highlighted the federal agency’s concern about the role Merrill Lynch & Co. played in the county’s investments. The SEC also may be looking at whether the supervisors should have acted sooner to halt the aggressive investing of the county’s former treasurer, Robert L. Citron.

In another development, the county said its first sale of investments from the troubled fund was a success.

Thomas Hayes, a former state treasurer hired to salvage the depleted investment portfolio, said he was very happy at the strong interest among bidders for nine separate bonds originally worth $483 million at face value.

Salomon Brothers Inc., the county’s financial adviser, had estimated the bonds would sell at about a 4.4 percent loss from face value. Hayes said that the Salomon estimate was fairly accurate.

The county’s investment fund, which attracted money from 186 other local school districts and cities, has lost $2 billion because of an excessively risky and losing bet that interest rates would go down. The bet has forced the wealthy county of 2.6 million people to file for bankruptcy court protection.

At an Orange County supervisors meeting, County Counsel Terry Andrus told supervisors not to discuss the contents of the subpoenas with the news media or the public.

″We have no reason to believe the board is the subject of that inquiry,″ Andrus said.

The Los Angeles Times, which first reported the subpoenas in Thursday’s editions, said the requests focus on communications and dealings with three Merrill Lynch brokers based in its San Francisco office: Michael Stamenson, Debra Harris and Duane J. Canaga. A Merrill spokesman declined comment.

Andrus quoted from the SEC’s letter to the supervisors, which said the inquiry ″should not be construed as an indication ... that any violations of law have occurred.″

While few details were available about the scope of the SEC’s subpoena, numerous interviews with bankers, lawyers and others say the focus undoubtedly is on the county’s unusual relationship with Merrill Lynch. The SEC already has issued a subpoena to the New York-based firm, the nation’s largest brokerage.

The main Merrill Lynch broker who dealt with Orange County, Michael Stamenson, is under investigation by the National Association of Securities Dealers in Washington for his $1,000 campaign contribution this June to Citron.

NASD, which enforces laws in the municipal securities market, is exploring whether Stamenson may have violated rules restricting contributions by municipal bond brokers. Two other Merrill brokers, Harris and Canaga, also contributed $1,000 to Citron, but it’s unclear if they too were under investigation.

Merrill Lynch has said it acted ″properly and professionally″ in its dealings with Orange County.

Several investment bankers were surprised at the large amount of business that Merrill Lynch, through Stamenson, did with Citron. Since July, for example, Merrill was the lead underwriter on $775 million worth of municipal bonds for the county, according to Securities Data Corp.

The bonds were sold after Citron’s investment strategy came under intense criticism in his June re-election campaign as too risky by accountant John Moorlach.

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