BOSTON -- The scandal involving former financial adviser and investment banker Mark S. Ferber has become a political issue in the Michigan governor's race.

A memo prepared for the Democratic candidate for governor, Howard Wolpe, by his staff describes the scandal that has rocked the municipal bond industry for the past two years and its relation to incumbent Gov. John Engler.

The memo, obtained by The Bond Buyer, said that the relationship between the Engler Administration and Ferber, the state's financial adviser, was "an example of how special interests have taken control of the state's financial affairs."

In a press release issued on Thursday, the Wolpe campaign lists 12 stories it claims that political reporters have ignored, including the ongoing criminal investigation by the U.S. attorney's office in Boston into an undisclosed fee-splitting arrangement between Ferber and Merrill Lynch & Co.

Ferber served as financial adviser on six state of Michigan bond issues since Engler, a Republican, took office in 1991. Merrill Lynch acted as the senior manager on three of the issues.

Kathleen McShea, Wolpe's communications director, said that Engler should be held accountable for hiring Ferber, who she alleged used Michigan's bond business to "line his pockets" with money.

"We think it shows extremely poor judgment on the part of the Engler Administration to allow such an individual into the decision-making process," she said.

McShea also criticized the Engler Administration for not launching its own investigation into the matter when news broke of the federal probe in Boston. In fact, Michigan was one of several governments across the nation that received subpoenas for documents in connection with the investigation.

"It deserves, at a minimum, a thorough public airing," McShea said. "Quite to the contrary, it seems to have been buried."

The press release also said that Merrill Lynch executives "are known" to have contributed $30,000 to the Michigan Republican Party last year.

"Merrill Lynch got rich because Ferber in Michigan was apparently doing their bidding," McShea said. "It appears to us that Merrill Lynch was [also] trying to buy influence by making themselves into someone who would be a big contributor to the Michigan Republican Party."

James Wiggins, a spokesman for Merrill Lynch, said Friday that the Wolpe campaign's charges "have no substance." He added that any contributions the firm made in Michigan were done in compliance with state regulations and were not made to buy influence.

The charges came just days before tomorrow's election, which has Wolpe, a former U.S. congressman and political science professor, trailing Engler by about 26 percentage points in the latest statewide poll. The charges apparently mark the first time a government's relationship with Ferber and Merrill Lynch has been brought up as a campaign issue.

John Truscott, Engler's spokesman, denied Wolpe's charges, saying that the administration stopped using Ferber after the grand jury probe in Boston became known. As far as any campaign contributions that were made, Truscott said "there is no quid pro quo whatsoever" for the state's bond business.

Last January, Michigan Treasurer Dong Roberts denied there was any impropriety in the relationship between the state and Lazard Freres and Merrill Lynch. He said that Ferber disclosed his relationship with Merrill Lynch on swap transactions and never promoted Merrill Lynch. Roberts also said the state never did a swap.

Nick Khouri, Michigan's chief deputy treasurer, who oversees most of the state's bond issuance, said that both he and state Treasurer Doug Roberts testified before the grand jury in Boston. He declined to say when that occurred or what was said.

Ferber has been in the news since early last year when an investigation by the Massachusetts inspector general's office showed he had an undisclosed contract with Merrill Lynch.

During the time of the contract, from 1989 through 1992, Ferber was one of the most successful financial advisers and bankers in New England. Among his clients were the Massachusetts Water Resources Authority; Washington, D.C.; the U.S. Postal Service; the state of Wisconsin; the Massachusetts Industrial Finance Agency; and the Massachusetts Port Authority.

In the late 1980s and early 1990s, Ferber was one of the rising stars in the municipal industry. In late 1992, he left his position as a partner at Lazard Freres & Co. and became co-chairman and part-owner of First Albany Co.

He was fired by First Albany in August of 1993 after the contract with Merrill Lynch was disclosed.

The contract, which paid Ferber $2.8 million over a three-year period, provided that Ferber's firm, Lazard Freres & Co., and Merrill Lynch work together and split fees on complicated interest rate swap transactions.

But the inspector general's report also states that the relationship between the two firms included Ferber's helping Merrill Lynch gain slots in different syndicates across the country.

During 1990, several Lazard Freres employees contributed to Engler's successful run for governor: Ferber, Michael DelGiudice, John Tamagni, Kenneth Gibbs, Robert Poll, Claire Wadlington, Richard Poirier, Raymond Dooley, Frank Strohm, and Joel Motley.

Immediately following Engler's election, Lazard was tapped to serve as Michigan's financial adviser.

In the report from the Massachusetts inspector general's office, the connection between Engler and Ferber is also clearly drawn.

In 1991, the first year of the Engler Administration, while Ferber was being paid $100,000 by the state and $1 million by Merrill Lynch, Merrill Lynch served as lead manager for five issues in Michigan totaling $693 million.

In 1992, the stakes were raised when the Michigan department of transportation also hired Lazard at a fee of more than $228,000. That same year, Ferber was retained to serve as financial adviser to First Albany for $120,000 a year.

During 1992, Merrill Lynch served as lead manager for $518 million of bonds over two deals for the state transportation department. First Albany was included in those deals, even though the firm had never done any business in Michigan prior to the two financings.

One source, speaking on condition of anonymity, said that Ferber was personally responsible for the allocations of the bonds.

"Ferber handled the RFP for the department of transportation financing and then Merrill got to run the books," the source said. "Then out of nowhere, First Albany is included in the group."

The source said that First Albany received a disproportionate amount of bonds for a member of the selling group.

Massachusetts' inspector general Robert A. Cerasoli said the contract placed Ferber's fiduciary responsibility to his advisory clients in jeopardy.

The report also alleged that, for his fee, Ferber was influencing some of his other financial advisory clients to include Merrill Lynch in syndicates and was helping to coach Merrill on how to answer questions during syndicate selection presentations.

The link between Ferber and Michigan is also documented on the Merrill Lynch side of the arrangement. In the Massachusetts inspector general's report, one of the appendixes, entitled, "Lazard Freres/Merrill Lynch Joint Projects," said that Michigan was a place the firm hoped to gain a stronger presence.

The entry in the appendix reads, "Work on enhancing [Merrill Lynch's] role with the Engler Administration -- depends on [Lazard Freres] as Financial Advisor."

The Wolpe campaign said this plan violates one of the clauses in the contract between the Michigan department of transportation and Lazard.

Section 16 of the contract reads, "[Lazard Freres] warrants that it has not employed or retained any company or person, other than bona fide employees working solely for [Lazard Freres], to solicit or secure this agreement, and that it has not paid or agreed to pay any company or person, other than bona fide employees, working solely for [Lazard Freres] any fee, commission, percentage, brokerage fee, gifts, or any other consideration."

Wolpe's campaign officials said this section runs counter to what was proposed between Lazard and Merrill.

Neither Ferber's attorneys nor a Lazard representative would comment on this story.

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