ATLANTA - The Federal Bureau of Investigation has requested records for a $250 million Kentucky Turnpike Authority bond issue sold last October, apparently in connection with an inquiry into the deal's lead manager Lazard Freres & Co., according to officials familiar with the request.
Pat Mulloy, secretary of the Kentucky Finance and Administration Cabinet, which oversees state bond offerings, said yesterday that an FBI agent visited the cabinet's offices last week asking for records on the turnpike deal, including a 10-page memo written by the cabinet staffers shortly after the deal was sold.
Mulloy said that it is his understanding that Lazard is the target of the FBI's interest and not state officials.
The memo alleges that Lazard investment bankers, particularly Richard Poirier, a partner, manipulated and misled state officials during the pricing of the turnpike refunding, and reneged on agreements concerning bond allotments. fees, and the reinvestment of proceeds.
Joseph Smith, a special agent at the FBI's Louisville office, said yesterday he would neither confirm nor deny that the bureau is conducting an investigation of the bond issue, in accordance with FBI policy.
Neither Poirier nor his attorney could be reached for comment. Lazard officials declined to comment.
The U.S. Attorney's office in Manhattan and the Securities and Exchange Commission are investigating a $2.9 billion refunding program by the New Jersey Turnpike Authority in 1991 and 1992. Lazard Freres was the financial adviser on the issues, and Poirier handled the account.
Mulloy said he is not aware of any criminal wrongdoing on the part of Lazard Freres in connection with the new Kentucky investigation. Mulloy was appointed finance secretary in November by Gov. Brereton Jones, a month after the sale of the turnpike bond issue.
Lazard Freres' political action committee contributed $14,000 to Jones and his political allies in 1991 and 1992. Mulloy said he knew of no connection between the naming of Lazard to be lead manager on the turnpike deal and the campaign contributions.
Lazard had not previously participated in any state financings in Kentucky.
The state official said he met with Lazard officials several weeks after his appointment, as part of a series of "courtesy calls" on investment bankers in New York City. He said he had no intention of excluding Lazard on future state financings despite the problems with the earlier turnpike deal.
"I met with Lazard bankers at the end of the year, and told them far as I am concerned I was willing to let bygones be bygones in terms of their participation in future bond issues, as long as they were willing to cooperate with our finance staff," he said.
In fact, Poirier still appears to be in good standing with some state officials. He attended a party at the Kentucky Derby last month hosted by the governor, according to Mulloy.
According to Federal Election Commission records, Lazard's political action committee, the Committee for Effective Government, contributed $10,000 in Kentucky during a three-day period in late October 1991 - less than two weeks before the election of Jones, a Democrat, to the governorship. The PAC contributed $4,000 to Jones on Oct. 25; $4,000 to Chris Gorman, a political ally of Jones running for attorney general, on Oct. 22; and $2.000 to the Kentucky Democratic Party on Oct. 25.
In July 1992, the Lazard PAC gave Jones, now governor, $8,000 to help him retire debt accumulated when he was running for lieutenant governor in 1987.
The memo sought by the FBI, which was written by six finance cabinet staffers to then-Secretary Joe Prather, criticizes Lazard's handling of the turnpike refunding deal.
"Lazard representatives were less than candid with Kentucky representatives throughout the underwriting process," it concludes. "This underwriting recalled many of the boiler-room tactics of an era we thought was behind us."
According to the memo, the problems began during the weeks leading up to the refunding's order period on Oct. 6, 1992.
"Debt service scenarios took days to generate," the memo says. "Lazard said that their preparation took so long because of the complexity of the issue, [but] after the fact we failed to see the complexities."
By Oct. 5 and Oct. 6, the memo continues, two major problem areas developed: bond pricing and allotments, and reinvestment of procceeds.
On the afternnon of Oct. 5, a consensus scale had been developed that "raised the specter that Lazard had the bonds presold on its preliminary scale and did not wish to reflect more aggressive levels."
Then on the morning of Oct. 6, according to the memo, Lazard abruptly terminated the order period on most of the early maturities of the deal without notifying state officials, "precluding many Kentucky retail orders from being placed."
Because of this, firms with offices in Kentucky - including J.J.B. Hilliard, W.L. Lyons Inc., and J.C. Bradford & Co. - did not get their orders filled, as promised in a syndicate meeting with Lazard officials on Aug. 21, according to the memo.
Robert Lee, an executive vice president at Hilliard, confirmed this in a recent interview.
"Lazard made representations that it would go out and fill our orders, but they didn't follow through," Lee said.
Also during this period, the memo says, Kentucky officials had expected the reinvestment of bond proceeds to be handled by one of three pre-selected bidders - which did not include Lazard - that offered Treasury securities at the lowest prices.
But Poirier threatened to collapse the deal if Lazard was not given the escrow, despite the fact that its bid was more than $1 million higher than that of PaineWebber, the low bidder, according to the memo.
Rather than have this happen, Kentucky officials decided to adjust "prices to a median point between the lowest bid and Lazard's bid," the memo said.
In addition to these problems, the memo also says that Poirier tried to mislead the state on fees, entering "a higher expense fee per bond in the closing documents than what had been authorized."
"The common thread in all these problems is that we found ourselves continually in a position of thinking we had reached an agreement, only to find that there was no agreement," Tanya Gritz, the finance cabinet's public finance manager and one of the authors of the memo, said in an interview. "There may have been some miscommunication, but I also think they lied to us in many instances."
The memo, however, does not find fault with the selection of Lazard as sole senior manager for the Turnpike deal.
According to the memo, the firm was selected as a "sole-source provider" in May, with a deal scheduled for June or July, because "Lazard came to us with a unique plan to establish a dedicated sinking fund which would redeem bonds on various Turnpike issues at varying times, but which would not require us to surrender debt service yield locked up in the 1986 issue."
Gritz said the state subsequently kept Lazard on as lead manager, even though it decided not to go with the proposed approach because it foresaw possible legal problems.