Still smarting in the aftermath of the biggest municipal bankruptcy reorganization in the nation’s history, Orange County voted on Tuesday to effectively ban doing business with Merrill Lynch.
The affluent California county’s Board of Supervisors, citing memories of Merrill’s role in its 1994 collapse, voted unanimously to prevent Merrill from handling any of its $4 billion in investment funds or advising on other transactions without a public hearing and board approval.
Legal scholars said it was the first time in memory a jurisdiction the size of Orange County singled out a leading public company for such harsh treatment.
”Merrill Lynch has got to clean up its act,” says supervisor Todd Spitzer, who pushed for the unprecedented measure. ”It continues to carry out all sorts of shenanigans, whether it be related to Enron or Martha Stewart. I don’t want them doing business here.”
While stressing the move would have no financial impact, senior Merrill executives concede that it comes at an awkward time as the nation’s largest brokerage firm struggles to maintain investor confidence despite a series of damaging scandals.
Both federal and state investigators have launched probes into Merrill’s role in a series of questionable energy deals with Enron. They are also examining Merrill’s actions in the ImClone inside-trading scandal involving Stewart.
In May, the Wall Street firm agreed to pay $100 million to settle charges that its research analysts hyped Internet stocks, triggering dozens of class-action lawsuits from investors.
The public relations mess has helped cut Merrill’s market value by a third this year, while the rest of the industry, also tainted by scandal, is off 25%.
”Orange County’s decision certainly suggests that the wounds run deep,” says Columbia University corporate law professor John Coffee.
Merrill had hoped to mend fences four years after paying $400 million to settle allegations over investments that led to the Orange County bankruptcy filing. Risky investments by former county treasurer Robert Citron produced $1.7 billion in losses, prompting the county’s bankruptcy filing.
Orange County still carries $930 million in debt that costs an estimated $93 million a year in principle and interest payments. ”We’ll be carrying the scars left by Merrill for another 30 years,” Spitzer says.
But Harvard Business School finance professor Samuel Hayes says the county runs the risk of further impairing its balance sheet by lashing out at Merrill.
”That kind of pique can be expensive if it denies Orange County the best counsel on its investments,” Hayes says. ”(Merrill) may have been tarnished by the events of the last few months. But Merrill remains a reputable firm with a lot of market savvy.”
Orange County Treasurer John Moorlach, in a memorandum to the board, said he favored letting Merrill Lynch bid for county investments because it would help save money on some purchases.
”The Orange County board’s decision relates directly to the bankruptcy,” Merrill spokesman Bill Halldin says. ”We are interested in doing business with the county sometime in the future.”