Mayor of Jersey City criticized for giving underwriter position as sop to WR Lazard.

Jersey City Mayor Brett Schundler drew fire this week for rewarding a firm involved in a recent tax lien sale with an underwriting slot on an upcoming bond issue.

Joseph Rakowski, a former acting mayor of Jersey City and potential political rival of Schundler, criticized Schundler's recommendation that WR Lazard & Co. be placed in the syndicate for an issue of $70 million Jersey City Sewerage Authority refunding bonds, scheduled for pricing in mid-September.

Rakowski, a Democrat, also accused the Republican mayor of inappropriate meddling in other underwriter selections and allocations on the deal, and asked state Assemblyman Rodney P. Frelinghuysen, R-Morris, to include the matter on the agenda of his proposed hearings into state bonding practices.

Frelinghuysen called for the hearings last week in response to charges that the state has mishandled underwriter compensations on other bond transactions.

In an interview, Schundler dismissed Rakowski's comments as uninformed, and said it is completely appropriate for the mayor to play a role in selecting underwriters for a bond issue that city taxpayers ultimately must repay.

Jersey City provides a "service contract" for the deal, which effectively guarantees debt service will be paid if the authority defaults.

Schundler said he recommended that WR Lazard, the financial adviser on a $44 million Jersey City tax lien sale in June, be added to the syndicate list for the sewerage authority's upcoming refunding issue because WR Lazard lost money on the June deal.

WR Lazard's $75,000 fee on the tax lien sale did not cover the firm's costs, so Schundler said he gave WR Lazard the syndicate slot both to help compensate the firm for the loss and to reward it for showing interest in city business.

In addition, Schundler said he proposed that R.D. White, Glaves & Co. be added to the syndicate for the sewerage authority deal because the firm is planning to open an office in Jersey City. Both firms are minority-owned, which Schundler said was another factor behind his recommendation.

The authority was expected last night to accept the mayor's selections in the course of approving an entire slate of underwriters, according to sources involved in the transaction. Donaldson, Lufkin & Jenrette Securities will be the bookrunning senior manager on the issue.

Schundler also signed off on allocations for the various underwriters, recommending that Donaldson Lufkin receive 38% of the bonds and Kidder, Peabody & Co., a co-senior manager, receive 14%. WR Lazard would receive the next highest allocation, at 12%. R.D. White, would be in a tier of underwriters each of which would receive 7% allotments under the mayor's recommendation.

In addition to criticizing Schundler's selection of firms and his role in allocation decisions, Rakowski also charged that the transaction violates a Jersey City ordinance that requires bond issues be sold by competitive bidding.

But Michael J. Israels, bond counsel for the issue and a partner at Fitzpatrick & Israels, said the ordinance does not apply to independent authorities. Even if it did apply, Israels said, the ordinance includes explicit exemptions for refundings.

Israels also defended the participation of the mayor in underwriter selections and his decision to reward WR Lazard for its help with the tax lien sale.

"As a concept, rewarding people who do a good job is only good business and good government," Israels said. "If you want to perceive it as giving WR Lazard a free ride on this deal because of prior losses, that would be inappropriate. But the intention is that they would still be expected to do a job and earn their compensation."

Rakowski, who said he would not rule out a run for mayor sometime in the future, has asked the U.S. Attorneys Office for the district of New Jersey and the state Attorney General's office to review Schundler's actions for possible wrongdoing.

Schundler said he believes Rakowski made his charges in part because of his own political ambitions and in part because of prodding by leaders of the state's Democratic Party. Schundler recently endorsed Republican Christine Todd Whitman in her bid for governor against Gov. Jim Florio, a Democrat.

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