How Wall Street ‘Paid to Play’ in O.C. Bond Game

For years, a number of Wall Street’s biggest firms and Orange County politicians engaged in a lucrative courtship, with campaign contributions flowing in one direction and multimillion-dollar bond deals being awarded in their wake.

Details, brought to light in the more than 9,000 pages of testimony before the Orange County Grand Jury obtained by The Times, show that well-connected lobbyists and political consultants were routinely hired to sway the county’s top elected officials, who chose the underwriting firms for billions in new bond issues.

The testimony provides several layers of detailed description of “pay to play,” a pernicious system of buying political access that federal securities regulators have been trying to stamp out in recent years. In often frank terms, both consultants and top county officials described how the normally secretive world of municipal finance operated in one of America’s richest counties, and how sensitive top officials were to criticism about their system.

Although no witnesses apparently came forward with information about blatant quid-pro-quo vote selling, the testimony made clear that those who hired the right lobbyists and made timely contributions could win the business.

Some of the most revealing testimony came from Scott Hart and David Ellis, prominent Orange County lobbyists whose Newport Beach firm has represented Merrill Lynch & Co. in obtaining county bond business since 1991.

The giant Wall Street firm, blamed by Orange County for $1.64 billion in investment losses that triggered the county’s bankruptcy, agreed to pay Hart and Ellis a retainer and a performance incentive--like a bonus--if they succeeded in getting Merrill Lynch selected as the underwriter of local bond deals.

“Our job was to assist Merrill Lynch in marketing bonds [and] underwriting services to different governmental agencies as well as the Board of Supervisors,” Hart explained, “[and] to educate them a little bit on what the political environment was in that particular jurisdiction where we were marketing the bonds.”

“Why would a Merrill Lynch or any other underwriter need [your services] to gain access to an elected official?” asked an Orange County prosecutor, who was leading the questioning before the grand jury.

“That is the way it has been as long as I have been around,” Hart replied. “I don’t know of any major underwriter service, bond service, financial service [operating] in this county that doesn’t have a lobbyist . . . working for them.”

Part of the lobbyists’ work involved educating their clients about the long-standing Orange County tradition of “district prerogative.” Under that practice, the selection of a bond underwriter was left to the county supervisor in whose district a capital project was going to be built.

It was important to know who would be exercising the prerogative, Hart explained, so that qualified firms “could come in and . . . present their product” to the right supervisor.

The testimony of Hart’s partner, Ellis, showed the kind of nitty-gritty details about considerations a client like Merrill Lynch received for its money.

Ellis analyzed in depth the political standings of Supervisor Roger R. Stanton, then-Supervisor Chairman Gaddi H. Vasquez, and Gary L. Hausdorfer, a director of the Orange County Transportation Authority and, at the time, a member of the San Juan Capistrano City Council.

Supervisors also serve on county agencies, such as OCTA.

In addition to hearing Ellis’ testimony, grand jurors listened as correspondence between the lobbyists and Merrill Lynch officials was reviewed.

“As you know, we ran into an unexpected problem with Supervisor Roger Stanton, chairman of [OCTA], during the last round of financing,” Ellis wrote in a February 1992 proposal to Merrill Lynch that he and his partner continue providing lobbying services.

Stanton was perturbed at the brokerage firm for not financially supporting the transportation sales tax initiative. “Supervisor Stanton’s term on [OCTA] expires in June 1992. He will be replaced by Supervisor Gaddi Vasquez. We believe Vasquez will replace Stanton on the finance committee.

“[Merrill Lynch] must spend the next few months developing a relationship with Vasquez,” Ellis continued. “As a Hispanic, he is a rising star in the Republican Party. He is up for reelection in June. Although well funded with over $200,000 in his account, he is always looking for more. Currently he has no opponent.”

Ellis recommended that the brokerage firm organize fund-raising events for both Vasquez and Stanton.

“Because [Vasquez] has no opponent, and he will be on the political landscape for many years, this is a good investment in the future,” Ellis wrote.

“Because of his predisposition against Merrill Lynch, [Stanton] must be turned around,” Ellis wrote. “Merrill Lynch must be involved in a significant way.”

Stanton accepted Merrill Lynch’s offer of a fund-raiser, but Vasquez turned it down.

Attorney Wylie A. Aitken, who represents Stanton, said in an interview Thursday: “It’s interesting to note that none of the [grand jury’s] allegations against Roger Stanton have anything to do with ‘pay for play.’ I can only surmise that if the district attorney felt they had seen any misconduct, they certainly would have gone out of their way to act on it.”

Reached Thursday at his Newport Beach office, Ellis said he would have “no comment” on any of his grand jury testimony. He said his partner, Hart, “is skiing and won’t be checking in for his messages. Would you?”

Vasquez resigned from the board in October. He could not be reached for comment.

In a letter to Merrill Lynch officials, Ellis also provided this assessment of Hausdorfer, then a San Juan Capistrano councilman, who is himself a lobbyist. “As you know, Gary has been a Merrill Lynch ally. However, he has recently brought Paine Webber on as a client, somewhat clouding his support.” But, Ellis continued, “Merrill Lynch must respond to Hausdorfer’s fund raising request rapidly.”

Hausdorfer could not be reached for comment.

Merrill Lynch, which is being sued by Orange County for $2 billion for selling longtime Treasurer-Tax Collector Robert L. Citron inappropriately risky securities on credit that exceeded state constitutional limits, has repeatedly insisted that it did nothing improper in its dealings with the county.

At the time Merrill Lynch hired the two Newport Beach lobbyists, the firm was eagerly eyeing a planned $500-million bond issue by OCTA, which was flush with the proceeds of a successful half-cent sales tax increase and anxious to launch the highway improvement projects voters had been promised.

“[OCTA] was dying to release their first list of pre-selected bond underwriters,” Hart testified. “Merrill was interested in being pre-selected.”

But, Hart testified, “it was a little late.” By the time they were hired, the business was about to be awarded.

Even though Merrill was not selected to underwrite the OCTA bonds, Hart testified that Merrill Lynch continued to retain his firm, paying as much as $4,000 a month at one point.

Asked if he had ever heard the term “pay to play,” Ellis said, “Sure.” What does it mean? he was asked. “Donate so you get considered,” he replied.

“Obviously, the theory didn’t play itself out in this case,” he noted, because “Merrill Lynch didn’t get any of the [OCTA] work.”

But Ellis’ remarks were confined to the brokerage firm’s efforts to underwrite bonds for OCTA. He did not mention that Merrill Lynch for years had participated in the county’s massive borrowings, and was the principal underwriter for and securities broker to Citron.

Grand jurors also learned a few new details about Citron’s already well-chronicled relationship with Merrill Lynch.

Lyle A. Overby testified that Citron sought his advice in his last campaign for treasurer, in spring 1994, when he was unsuccessfully challenged by John M.W. Moorlach. (Moorlach was appointed to the office months after Citron’s resignation.)

Considered one of the county’s most influential political operatives, Overby has represented a number of high-profile clients, such as the Santa Margarita Co.

In the 1970s, Overby worked for Supervisors Robert W. Battin and Ralph A. Diedrich, two of the county’s most powerful politicians, who both lost their jobs over corruption allegations. Neither scandal hurt the then-budding lobbyist.

When asked if he had ever campaigned for Stanton, Overby testified that Stanton holds a fund-raiser “every four years or thereabouts” and “I believe I have been involved in most of those.”

“I have been involved in politics for 20 years, and I am only 44 years old, so I have a lot experience in this stuff,” he testified.

Overby portrayed Citron as “an odd fellow” who was very disturbed by Moorlach’s criticism of his investment practices. During the campaign, Overby said Citron, a Democrat, told him he intended to enlist Merrill Lynch & Co. to get Republican Moorlach to tone down his attacks.

“It is obvious that Bob was pretty close to Merrill Lynch, and he said that these Merrill guys were going to pressure the Republican Party into . . . lightening up on him,” Overby said, adding, “I laughed. I mean, that is absurd.”

Overby also testified that Citron told him Merrill Lynch would provide substantial assistance to his reelection campaign, quoting Citron as saying that Merrill Lynch salesman Michael G. Stamenson, a confidante of Citron’s, would raise money for him.

According to Overby, Citron claimed that the brokerage firm would contribute $120,000.

Overby said he told Citron not to accept the money from Merrill until after the election in order to avoid negative publicity. “That is the absolute norm in elections statewide and nationally,” Overby testified.

But campaign records show Citron received only $4,000 from Merrill Lynch-related parties--$3,000 in donations from Merrill Lynch employees and $1,000 from Stamenson’s wife.

Overby also helped Citron solicit campaign donations. He said Citron drew up a list of 50 to 60 names. On the list was Jeff Leifer, a financial advisor to Citron, whom Overby described as “a well-known commodity . . . who would write a check.”

Asked how he met Leifer, Overby said he couldn’t recall, but added that “where you generally see these people are at fund-raisers, standing around the carrots and ranch dressing.”

Leifer, who advised Citron on the borrowing of $2.9 billion, hosted a fund-raiser for Stanton aide Robert L. Richardson, a Santa Ana councilman, and made a onetime $250 contribution to Stanton and three small donations to Richardson.

A spokesman for Leifer said, “Leifer Capital has never participated in any improper efforts to garner business and, in fact, has never employed a lobbyist to solicit business in Orange County or anywhere else in the state.”

The spokesman added, “Our firm never sought, expected or was aware of any special considerations.”

Former Finance Director Eileen T. Walsh testified that she was ordered by her former boss, Murry Cable, at Stanton’s request, to add Leifer’s name to a short list of firms qualified to compete for the job as financial advisor on a county bond deal.

Walsh testified that Stanton approached her at one point and told her, “Jeff was the smartest banker on the street and I should do whatever Jeff said.”

Walsh also told the grand jury that some financial advisors held fund-raisers for board members to curry favor with the supervisors and that she was routinely asked by board members to attend the functions and “schmooze with the investment bankers.”

Furthermore, Walsh said that when the board had to select a financial advisor, supervisors requested that they be supplied with the list of candidates a week before it was made public.

“It gave the board more time to schmooze with the people who were able to come talk to them about why they were qualified,” Walsh testified.

A couple of witnesses also testified that Stanton was so concerned about an article in The Times last January about pay-to-play issues and his relationship with Leifer that he or his staffers called them before the article was published to get them to retract any statements they may have made to reporters.

“I was sick and tired of getting phone calls . . . from [Stanton’s] 1st District [office],” Doug Woodyard, a former executive assistant at the county, told the panel.

Woodyard testified that he received at least three calls from Stanton’s office about the article and he wasn’t even quoted in it.