Massachusetts has barred Merrill Lynch & Co., Lazard Freres & Co.. and First Albany Corp. from an upcoming state sale of refunding bonds because officials at the firms maintained private business ties without telling the state, a spokeswoman for Treasurer Joseph P. Malone said yesterday.
In late 1991, Malone asked all firms interested in underwriting state debt to answer certain disclosure questions.
One question asked if the firm has "any ongoing arrangement with any unrelated individual or entity with respect to sharing of fees received from services provided to the office of the treasury. "
The responses -- one prepared by Merrill Lynch managing director Jeffrey Carey and the other by Lazard vice president Donald Klein -- said that neither firm was involved in any sort of fee-sharing relationship.
But records the firms recently released to state officials detail an arrangement between Lazard Freres and Merrill Lynch in which the two shared about $2.4 million in fees related to state swap transactions.
The agreement was detailed in a contract written in 1990 by Douglas W. Hamilton, managing director of municipal derivative products at Merrill Lynch, and signed by Mark S. Ferber, then a partner at Lazard. Ferber has since moved to First Albany, which is why First Albany was included in the underwriting ban, said Susan Collins, the treasurer's spokeswoman.
"The recent revelations about this undisclosed agreement signals to us that neither Merrill Lynch nor Lazard Freres made complete disclosure
closure to the state in 1991," Collins said. "Both firms are now excluded from consideration for state financings until we receive an answer from the firms."
In the agreement, Ferber and his staff were paid $800,000 per year on retainer for advice on complicated interest rate swap transactions and also agreed to split the fees from the transactions from which the two firms were involved.
The contract also contained a provision that called for both parties to keep the terms of the contract secret.
In a separate agreement, Ferber and his staff were paid approximately $170,000 over a 17-month period to provide corporate advice to First Albany.
Neither agreement was reported to the state treasurer's office on the required disclosure forms. Collins said neither Merrill nor Lazard ever updated its disclosure file since answering the questionnaire in late 1991.
A spokeswoman for Lazard Freres confirmed that the firm has been asked by the office of the treasurer to provide an explanation. "As we have agreed on with the treasurer's office, we will provide a written explanation with our response [Friday]. It would be inappropriate for us to comment any further until then."
James Wiggins, a spokesman for Merrill Lynch, said, "We are addressing this matter directly with the client, so any comment in the press would be inappropriate."
Wayne S. Budd, a partner at the Boston firm of Goodwin, Procter & Hoar, has been retained to represent First Albany. He had no comment on the treasurer's decision. The decision by the treasurer's office affects three of the most powerful and successful sellers of Massachusetts bonds over the last five years.
Since 1988, Merrill Lynch underwrote $9 billion of bonds in 25 deals, Lazard Freres handled $5.2 billion on 14 deals, and First Albany was involved in the underwriting of $2.3 billion on eight deals, according to Securities Data Co.
Collins said the commonwealth is slated to sell an issue of refunding bonds within the next few weeks.
She said the loan, for which Bear, Stearns & Co. will be the senior manager, will probably be in the $400 million to $500 million range, depending on market conditions and concerns the state has about negative escrow.
The secret dealings between the firms have shaken the Massachusetts bond community to its core.
On Wednesday, the board of directors of the Massachusetts Water Resources Authority disbanded its syndicate and dismissed First Albany as its financial adviser. The board also adopted a new set of ethical and fiduciary guidelines designed to improve the authority's financial agents' disclosure practices.
"I always thought that we did one of the better jobs in gleaning disclosure from our financial people." authority executive director Douglas B. MacDonald said in an interview. "Maybe all of us issuers need to improve our disclosure practices."
The authority's board passed the new guidelines on Wednesday with only one member -- Samuel Mygatt -- abstaining.
Mygatt's wife, Susan, is an attorney at Goodwin Proctor, which was retained to represent First Albany's interests.
Boston officials last week dissolved the city's syndicate -- led by First Albany -- and announced the next bond issue will be sold competitively. Federal authorities are also reportedly reviewing state and city bond issues.