You need to know some more about MVC before we go ahead and discuss where to put everything. Well, if you want to follow the pattern. Otherwise you can stop reading now.
The pattern is very loosely defined. There is nothing that says how the controller, view or model should look like or how they should be structured. The pattern simply states that you should separate the parts and how they should interact with each other. So let's look at bit more about what they are (my interpretation).
MVC
Model
The model can be anything. It can be a webservice, your repositories, your service classes or simply your domain models. The Model are everything that are used to get the information that you need. Consider the "Model" as a layer instead of just an single object.
Controller
The controller is a glue. It takes the information from the Model and adapts it to the view and vice versa.
View
The view should only render what the user sees.
Do note that you should not confuse the Model with View Models. Microsoft should really have named the "Model" folder "ViewModels" since that's what they are. I would not use information from the "Model" directly in the views. Failure to do so would mean that you have to change the Model if the View is changed and the other way around.
The answer
The model is not a view model but a layer. Everything in the model is used to fetch the information needed for the view. The controller takes that information and puts it into a single view model.
A single controller action might use one or several calls to the "Model" to be able to assemble the information needed by the view.
That means that your second option is the most correct when if you want to get an application which is easy to maintain and extend.
Do note that a service layer might not be needed. You can call the OR/M directly from the controllers. But if you find yourself duplicating code or getting fat controllers, simply move the logic to a service layer. Nothing but the controller will be affected by that change since you are using proper view models.
