The New York State Banking Department is examining a controversial loan made by Fleet Bank to the 1992 U.S. Senate campaign of New York City Comptroller Elizabeth Holtzman to determine if Fleet followed "proper loan guidelines," a state government source said.

The banking department regulates state-chartered banks, such as Fleet's Melville-based affiliate.

The review follows the publication of a city Department of Investigation report on Fleet's $450,000 loan to Holtzman, and the subsequent recommendation by Holtzman's office of Fleet Securities as a co-manager in the city's bond underwriting syndicate.

The DOI's report details possible violations of city conflict of interest rules, as stated in the city charter. The city's Conflicts of Interest Board is reviewing the report and may take enforcement action. Holtzman, who chooses underwriters along with Mayor David N. Dinkins, has denied any wrongdoing.

The report, released Wednesday, details the relationship between Holtzman, her finance and campaign officials, and key banking and municipal underwriting executives at Fleet Financial Group, the Providence, R.I., holding company for Fleet Bank and Fleet Securities.

The report denounces Holtzman as "grossly negligent" for her role in obtaining the loan from Fleet Bank and her office's promotion of Fleet Securities as a co-manager in the the city's bond underwriting syndicate. Fleet had served in a less lucrative underwriting position as a member of the city's selling group bracket.

Although the DOI stopped short of criticizing Fleet, federal regulators and private bank lawyers said the report's findings regarding Fleet's role in the matter may lead to regulatory or law enforcement action.

The state banking department, one such regulatory agency, is examining the matter to determine if the bank followed proper rules in making the loan to Holtzman, said a government official close to the department.

"It really is a question of whether the loan was improper." said the, official, who asked not to be identified. [The department] wants to know if the loan was properly-handled by the bank."

The source refused to elaborate on what enforcement action, if any, the banking department can take. The source said the banking department will likely "talk to some of these people [at Fleet Bank]" to determine why the loan "was done the way it was done."

Clare Sykes, a spokeswoman for the state banking department, refused to comment on the review.

The DOI's report says that James P. Murphy, a vice president at Fleet Financial Group who served on the fund-raising committee for Holtzman's failed Senate campaign, lobbied bank executives to make the loan.

According to a May 1989 article in the American Banker, a sister publication of The Bond Buyer. Murphy's job is to "coordinate Fleet's lobbying efforts, its public finance and municipal finance business, and develop special programs for housing and education."

The DOI report details how Murphy played a dual role at the bank.

According to the report, Murphy brought together Holtzman and her key officials with executives from Fleet Securities, which was seeking to expand its role in city bond deals.

At the same time. Murphy played an important role in helping Holtzman's Senate campaign receive a $450.00 "loan that the bank originally considered "undesirable," the report says. Holtzman owes approximately $200,000 on the loan.

Published reports say the Department of investigation forwarded its findings to U.S. Attorney Mary Jo White for possible criminal charges against Sheila Levin, the finance director for Holtzman's Senate campaign, for failing to properly disclose Wall Street interest in a September fund-raiser that the bank used as collateral on the loan. Levin has denied any violations.

Fleet made the loan at 7% interest, just 1% above the prime rate. Legal experts in the banking industry say Fleet's relationships with Holtzman put the bank in a questionable position. The fact that the bank made a campaign contribution to Holtzman while Fleet was attempting to solicit business from the city raises legal questions, they say.

"There are any number of federal and state statutes that could have been violated by Fleet," one source said. "If you made a below-market loan to get underwriting biz, that's a very serious legal problem."

The source said that federal law limits bank holding company activities that may benefit a subsidiary. Making a campaign contribution to a customer could be a violation of that statute. the source said.

In addition, one government regulatory official said Fleet's dealing with Holtzman may violate so-called anti-tying prohibitions in the Bank Holding Company Act, which prohibits banks from making loans conditional on purchases of other services, such as underwriting.

Thomas Lavelle, a spokesman for Fleet Financial Group, declined to comment on reports that the bank is being investigated by federal or state regulators for possible banking law violations. "We're confident we haven't violated any laws or regulations." Lavelle said.

The DOI report, which was issued after an extensive four-month investigation, says that Fleet's Commercial Credit Policy Manual characterizes political loans as "undesirable." Lavelle said the bank has made "a few" political loans, but stressed that such loans are not common. He added that the loan is "not literally undesirable, but requires a heightened level of scrutiny given its historic risk factors, like loans to hotels, restaurants, and ski resorts."

According to his DOI testimony, Edward Fanning, executive vice president and senior lending officer at Fleet Bank, advised Murphy that "this was an undesirable loan and that I was reluctant to get involved in it."

The report says that despite the initial reluctance of Fleet Bank to make the loan. Murphy continued lobbying on Holtzman's behalf. Nancy O'Connor, a senior vice president and loan officer at the bank, said Murphy had recommended that the bank approve the loan.

O'Connor told city investigators that "James Murphy ... has recommended this loan to meet the needs of Ms. Holtzman's campaign in order to support the bank's relationship with her and New York City, via her position as City Comptroller."

Murphy's relationship with Holtzman and her staff began in June 1990, when Murphy sought meetings with senior members of the staff in order to obtain a greater share of city underwriting business, the report says.

The report documents several meetings between Murphy, Fleet Securities executives, key financial people working for Holtzman, and Holtzman. The meetings involved fund-raising activities, as well as an introduction of Holtzman and her staff to Fleet public finance executives.

On Aug 20, 1992, the report documents a meeting between Murphy, O'Connor, and another senior bank executive, and Levin. During the meeting Levin gave O'Connor a document showing that the committee expected to raise $375,000 at a fund-raising dinner. The fund-raising pledges would be used as collateral, but Holtzman would have to guarantee the loan personally.

On Aug. 2 1, the report says, O'Connor told bank officials she would not approve the loan largely because the bank's internal credit rules classified it as undesirable. "To a lesser degree," the report says, "[O'Connor's] refusal was based on her opposition to Holtzman's political positions."

Later that day, O'Connor had a change of heart and recommended a $400,000 loan relying "on Murphy's expertise in the area of public fund-raising." Later the bank would approve an additional 50,000 for the Holtzman campaign.

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