Mark S. Ferber, a former financial adviser to the Massachusetts Water Resources Authority, secretly helped Merrill Lynch & Co. obtain the agency's business as a "quid pro quo" for promoting him to other issuers around the nation, the state's inspector general alleged yesterday.
In a scathing seven-page letter to the authority, inspector general Robert A. Cerasoli said that despite several statements to the contrary by officials at Merrill and by Ferber, who worked for Lazard Freres & Co. at the time, the conflict of interest is documented in internal documents he obtained from the firms.
Cerasoli's report was sent yesterday to all major state legislative, executive, and judiciary leaders. Cerasoli said that "the details contained in this report are so extraordinary and compelling that I find it necessary ...to make this information public."
Cerasoli's report also concludes that the misconduct cost the taxpayers of Massachusetts millions of dollars.
The report states that, between 1990 and 1993, MRWA paid between $3.5 million and $11.5 million more in debt issuance costs than five comparable isusers.
The report blasts Lazard and MWRA officials. "Any expectation that paying a high fee would translate into quality was not met. Instead, Lazard Freres treated the MWRA as collateral to increase its own profit by seeking and obtaining other business with the authority's underwriters."
Cerasoli said in an official report accompanying the letter that Ferber provided Merrill Lynch with confidential advance information regarding the MWRA's underwriter selection process at a meeting in which he solicited the firm's business.
The meeting took place while Ferber was still retained by the MWRA to serve as its independent financial adviser.
Additionally, Cerasoli's report states that Ferber coached Merrill Lynch as to whom the firm should send to the authority's oral presentation. He also critiqued the previous performance of Merrill Lynch at the last underwriting choice.
At that meeting, Ferber discussed with Merrill officials his relationship with MWRA and several others topics, including the Massachusetts Port Authority, the Boston Water and Sewer Commission, the Commonwealth of Massachusetts.
Ferber continued "providing inside information" at the request of Merrill Lynch during the MWRA's 1992 underwriting selection.
A document obtained by Cerasoli's office specifically asked Ferber to judge Merrill Lynch's answers to questions in comparison with the answers other firms submitted.
Cerasoli said that Ferber "apparently" provided Merrill Lynch with information that the firm answered incorrectly to one question, disclosed the identity to one other senior manager finalists, identified how much time would be apportioned to various questioners, and told Merrill what issues would come up at the oral presentations.
Additionally, Ferber told Merrill Lynch in 1989 that the only, reason they were being considered for one of the senior slots on the Massachusetts Port Authority bond syndicate was because of Ferber's relationship with Massport's director of administration and finance, Gloria Vaconis.
Cerasoli said that despite Merrill Lynch's repeated disclaimers, the firm's placement on the MWRA syndicate was a "quid pro quo" relationship.
He said that certain documents suggest that Ferber told a senior Merrill official in early 1989 that he "works to make a positive spin for Merrill Lynch's performance at every turn."
Later that year, Ferber and Merrill Lynch entered into a confidential agreement that paid Ferber and his staff $1 million over three years.
Ferber served as the senior staff member for William F. Bulger, the president of the Massachusetts Senate. He left Bulger's staff in 1981, and began work as an investment banker at Kidder, Peabody & Co. in Boston.
Since then, Ferber has worked in the public finance departments at First Boston Corp., Lazard Freres, and finally at First Albany Corp. He was most recently vice chairman at First Albany.
Ferber was dismissed from First Albany after the undisclosed contract surfaced with Merrill Lynch. In that contract, which existed between 1989 and 1992, Ferber marketed and helped structure complicated interest rate swap transactions for several issuers.
One provision of the deal said that neither Ferber nor Merrill Lynch could disclose the terms of the retainer agreement.
James Wiggins, a spokesman for Merrill Lynch, said the firm had not had a chance to review the report and would have no comment until they did.
Ferber's positive spinning of Merrill Lynch reportedly also earned him business in other states, including one in Indiana Trace, Florida transaction.
The report also criticizes MWRA officials, who told Cerasoli's office that the authority awarded Merrill Lynch a no-bid swap contract because they were the only firm that submitted a bid. But a review of MWRA documents show that Goldman Sachs & Co. submitted a similar proposal to the authority in the spring of 1990.
In comparing the financial performance of those swaps, Cerasoli said Connecticut rejected a Merrill swap proposal because the up-front fee proposal was too high.
The report, however, also compares Ferber's actions with Merrill Lynch to deals involving Goldman Sachs.
The report documents that Ferber asked Merrill to provide him with further fee income indirectly by underwriting deals for the Massachusetts Industrial Finance Agency. Although Ferber was not the agency's financial adviser, he told Merrill officials he was the "informal" financial adviser.
Merrill would split fees on the deal with Lazard's New York underwriting desk, which would act as co-senior manager on the deals. Ferber would then take credit for the business generated.
The report notes that Goldman also underwrote four deals for MIFA in 1989, splitting $1.6 million in fees with Lazard as co-senior manager. The report indicates that Ferber then told his superiors that "the Boston office of Lazard Freres was responsible for bringing these fee revenues to Lazard Freres and in each instance specifically listed Goldman' on the fee sheets."
