MWRA kept in dark about Lazard's link with other firms, state officials told.

Executives at the Massachusetts Water Resources Authority knew almost nothing about ties between its financial adviser and two of its underwriters, they said this week in a letter sent to state officials investigating the relationships.

Officials at the firms involved in the private agreements -- Lazard Freres & Co., Merrill Lynch & Co., and First Albany Corp. -- have defended the contracts on the ground that full disclosure was made to all the issuers involved.

But in a 14-page previously undisclosed section of a letter from the MWRA to the Massachusetts inspector general, authority executives claimed they had been kept largely in the dark.

In the letter, obtained yesterday by The Bond Buyer, Douglas A. MacDonald, the authority's executive director, gives a detailed chronology of the disclosures made by bankers involved in the arrangements, which have raised questions about conflicts of interest.

Mark S. Ferber, the authority's financial adviser, has recently disclosed that he maintained business ties with Merrill Lynch and First Albany -- two authority underwriters -- while acting as the independent financial adviser to the MWRA.

The disclosures have prompted the authority to announce plans to dissolve its syndicate and dismiss its financial adviser, in a vote expected at a board meeting today.

MacDonald said in the letter to inspector general Robert A. Cerasoli that recent questions about the propriety of the contracts made between Ferber and two firms involved in the authority's underwriting team "create at the very least unacceptable perceptions of the possibilities of serious conflicts of interest and raise significant questions about our adviser's ability to discharge his fiduciary responsibilities to the authority."

Ferber currently is vice chairman and partner at First Albany Corp.

He has been the water authority's financial adviser for the last 10 years. In that time he has worked at Kidder, Peabody & Co.; First Boston Corp.; Lazard Freres; and First Albany.

While Ferber was a partner at Lazard Freres, he and his staff entered into an agreement with Merrill Lynch whereby the two firms would split fees on complicated swap transactions that Ferber would promote to issuers.

Additionally, Ferber and his staff were kept on retainer by Merrill Lynch to help structure and market swaps.

A contract signed by Douglas W. Hamilton, managing director of municipal derivative products at Merrill Lynch, to Ferber dated Dec. 5, 1989, details most of the particulars of the agreement.

"You are an active and established participant in the public finance markets, both as an underwriter and as a financial adviser, and have numerous contacts with finance officials at state and local governmental units and other entities that engage in transactions in the public finance markets," Hamilton wrote. "Merrill Lynch seeks to obtain your advice in respect of the presentation, marketing, and sales of swaps."

The following June, Ferber signed an amended contract with Merrill Lynch that, included the compensation for the retainer.

Ferber and his staff were paid $800,000 per year, paid in three installments, over and above the 50% split of $6 million in fees that were earned on the swaps the two companies structured together.

They were compensated, according to the MWRA letter to Cerasoli, for consulting with Merrill Lynch on swaps and using their presence in the public finance markets to entice issuers to participate in Merrill swaps.

MacDonald's letter says that while Ferber had informed Philip N. Shapiro, the authority's chief financial officer, about "an out of state interest rate swap transaction in late 1989," Shapiro was not fully informed about the extent of the relationship.

The authority participated in two swaps with Merrill: a $90 million liability swap in May 1990 and a $78 million asset swap the following month.

"The authority was not aware at the time it executed the swap transactions, that Lazard would be paid additional compensation under their agreement, or that the two firms had a continuing and ongoing relationship," MacDonald wrote.

When Ferber and the entire Boston office announced they were leaving Lazard to join First Albany, authority treasurer Kenneth Wissman wrote a staff summary recommending that the authority keep Ferber and his staff as financial adviser.

MacDonald said in his letter that at that time -- this past February -- authority officials were still unaware of their financial adviser's relationships.

"The authority knew nothing of this agreement or its terms until it was reported last month," MacDonald wrote.

"If we had been told about the retainer relationship, we would have asked for a full accounting from both firms involved and figured out how to deal with it then," Shapiro said. "We would not have gone ahead with the switch to First Albany in February if we had known."

In addition to containing a section that specified the retainer compensation, the amended contract also contained a provision forbidding Ferber or Merrill Lynch from revealing without permission from the other party the terms of the agreement.

"You agree that you will not at any time, without the express prior consent of Merrill Lynch, divulge the existence, substance, or text of this agreement to any other person, other than the substance of the relationship between you and Merrill Lynch," Hamilton wrote. "The confidentiality obligations of you and Merrill Lynch set forth in this section ... shall continue notwithstanding any termination of this agreement."

The document also says that Ferber and his staff, while employed by Lazard, was paid $10,000 a month over a 17-month period to analyze First Albany's corporate structure, compensation plan, and other parts of the firm's corporate structure.

Additionally, the letter reveals that Ferber told Shapiro that Lazard was serving as an "investment banker" for PaineWebber Inc. in 1989.

Terry Atkinson, managing director of the municipal securities group at PaineWebber, said he was unaware of such a relationship and said if one existed, it had nothing to do with the municipal securities group.

PaineWebber was a member of the MWRA syndicate in 1989.

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