Orange County to sue Merrill

Orange County, the California jurisdiction that lost up to $2.5bn on derivatives speculation, is expected to sue Merrill Lynch, the broker with which it did a substantial part of its dealings.

Merrill said it had not received a writ but there was no basis for any action and if one did emerge it would be vigorously contested. It was responding to reports that it was to be sued for "huge damages" by Orange County, which has already begun a series of lawsuits against Wall Street firms that seized collateral it gave on loans.

Merrill said the county's investment strategy was "well known for many years, applauded by numerous public officials when it regularly produced above-market returns over a lengthy period, and was the subject of intense public debate during a recent election campaign."

Merrill also described as preposterous reports that Orange was planning to claim that it failed to disclose the risks involved with the investments it purchased.

As the widely predicted attempt by Orange to blame Wall Street for its predicament loomed, the US Securities and Exchange Commission was claimed by the Los Angeles Times to be investigating possible influence-peddling, to determine if brokers paid kickbacks to elected officials.

The probe has focused on "campaign contributions and kickbacks, things of that nature, and the relationship of broker-dealers to those officials," a high-ranking source close to the investigation told the newspaper.

It also emerged that Robert Citron, the Orange County treasurer who resigned after the losses emerged, was asked by the SEC about the county's highly leveraged holdings months before the investment funds filed for bankruptcy protection. But the agency thought it had no jurisdiction to intervene.

Staff from the SEC's Los Angeles office interviewed Mr Citron, his deputy and the county's lawyers. The investigation ended when it became clear that Mr Citron had not violated anti-fraud provisions of US securities laws. The SEC also believed it had no authority to tell Orange County how to invest. The SEC has subpoenaed members of the Orange County Board of Supervisors, demanding documents related to local finance and communications with Merrill Lynch. Board members said they would cooperate fully with the SEC.

Salomon Brothers said the second stage in a sale of Orange County securities attracted bids totalling more than $4.8bn. The company said it sold $566m of "fixed-rate, non-structured agency securities" held by the Orange County investment pool, thereby a lmost completing the sale of all the county's holdings in this type of security.

The Orange County Board of Supervisors adjourned its emergency hearing dealing with bankrutpcy issues. The board also approved a broad outline for distributing funds in its bankrupt investment pool to local agencies.

Payments will be made for only "absolutely essential and compelling" items, Orange County's legal counsel, Bruce Bennett, told the board.

Payments will also be restricted to 30 per cent of the balance that each pool participant holds in the portfolio. "There is no liquidity issue. There is adequate cash in the fund to make these distributions," Mr Bennett assured the Board of Supervisors. He said he would meet throughout the day with members of the creditors' committee to reach exact distribution amounts and the wording of the agreement.