Federal authorities have begun a investigation into Louisiana's recent general obligation bond issue to find out why Lazard Freres & Co. and First Boston Corp. gave up half their profits to a little-known local underwriter, according to federal and state officials.

The U.S. attorney in Baton Rouge, Raymond LaMonica, confirmed in an interview that his office has begun an investigation into the profit-sharing arrangement, but said he could not provide further details.

According to state Treasurer Mary Landrieu, who is also conducting a inquiry into the matter, First Commonwealth Securities Corp., a New Orleans-based minority owned firm, received $125,694.25 from Lazard and $108,289 from First Boston - in each case 50% of these firms' expected compensation for the $604 million bond issue, sold in early February.

"There was a very substantial transfer of funds to First Commonwealth that is unexplained," Landrieu said in an interview. "We know that First Commonwealth didn't sell any bonds - so the question is why in the world would two firms give up half of their profits to another firm that had no visible role in the deal?"

A Lazard Freres executive has said that an unnamed state official suggested the profit-sharing arrangement.

Several New Jersey deals have also come under federal and state scrutiny after Armacon Securities, a small but politically well-connected underwriter, was included on syndicates and split profits with companies without ever selling any bonds.

First Commonwealth was included in a 17-member tier of under-writers designated as senior co-managers, but the firm did not sell any bonds, according to Landrieu. Merrill Lynch was the bookrunning senior manager, and First Boston and Lazard were co-senior managers. The syndicate comprised a total of 32 firms.

Landrieu, who serves as chair-woman of the state's Bond Commission, said she first learned of the arrangement through an anonymous tip in late May, four months after the state sold the deal. She said she immediately began an inquiry into the matter and has shared information with the Federal Bureau of Investigation, which began its probe early last month.

On Thursday, Landrieu said, she presented her findings to a closed session of the commission. Landrieu said that while she is not currently aware of any criminal wrongdoing in the profit-sharing arrangement, "I am extremely troubled by it because it seems to violate our process of an open and competitive selection of underwriters."

Landrieu said there were also unanswered questions about the role in the arrangement of Merrill Lynch, the bookrunning manager in the deal.

She said no decision has been made as to what action, if any, should be taken against the firms, but she said members at the Bond Commission meeting last Thursday discussed tightening rules against third-party arrangements.

A spokesman for Lazard Freres confirmed Friday that his firm had shared 50% of its $251,388.50 of profits with First Commonwealth. He said Lazard was aware of the federal inquiry, and would lend its full cooperation to federal officials, but had been advised it was neither the subject nor the target of any investigation."

During the preliminary stages of any federal investigation, it is standard procedure not to name anyone as a target, until initial data have been gathered and conclusions drawn as to where the investigation should head.

Lazard's spokesman said, "At the time Lazard Freres was selected by the bond commission to serve as co-senior manager on the bond issue, it was suggested to us by a member of the Bond Commission that we enter into a joint account arrangement with First Commonwealth Securities."

"We were told that this was to further the affirmative action objectives of the state," he added. "Such joint account arrangements are common in the municipal finance industry and are frequently encouraged by state and local issuers in order to achieve their affirmative action objectives."

The spokesman also said that "other members of the syndicate were generally aware of this arrangement with First Commonwealth and we were advised that other members of the Bond Commission as well as other state officials were also aware of the arrangements."

The spokesman declined to say who the Bond Commission had suggested the joint arrangement.

Officials at First Boston did not return phone calls Friday.

But a June 4 letter to Landrieu from First Boston managing director L. Patrick Oden confirms that the the firm paid the $108,289 to First Commonwealth out of the firm's total compensation of $176,270 on the deal.

We understand generally that a representative or representatives of the State of Louisiana requested that we make such an arrangement with First Commonwealth," Oden wrote.

Oden also said in the letter that "while we paid First Commonwealth $20,154 in excess of one half of our compensation, we expect to receive additional proceeds from Merrill Lynch on this offering, and had merely paid Commonwealth in advance in anticipation of being made whole by Merrill Lynch."

Monica Prihoda, a Merrill Lynch spokeswoman, said Friday that her firm had not received requests for information from federal officials and was not the target of a federal investigation.

She said the firm had a general knowledge of the arrangements that First Commonwealth had with Lazard and First Boston but was not aware of the specifics of those arrangements.

In a June 23 letter to Landrieu from Merrill Lynch director Craig F. Small, the firm responded that it had rebuffed a request from First Commonwealth to allocate it $100 million of bonds, adding "we understand that First Boston and Lazard Freres agreed to make their own financial arrangements with First Commonwealth."

Small also wrote that those two firms' arrangements with First Commonwealth were "not made pursuant to [its] authority as senior manager and that [it] did not have a similar arrangement with First Commonwealth or any other firm or firms in the underwriting syndicate."

Officials at First Commonwealth could not be reached for comment on Friday. But in a July 8 letter to Landrieu from Nobert Simmons, the firm's president, Simmons angrily refuses to respond to the treasurer's inquiry.

"I understand that you have raised several issues about our contractual arrangements with two investment firms with whom we have a vital and valuable business relationship," Simmons wrote. "Your interference into these relationships is improper and injurious to me and my firm. Indeed based upon your improper interference, these companies have failed to honor commitments made to us."

Landrieu said she did not know of any other Bond Commission members who had authorized the profit-sharing arrangement.

According to Bond Commission records obtained after 31 out of the 32 members of the syndicate responded to a questionnaire, members received total net commissions of $3,021,444.

Under this schedule, First Commonwealth, which refused to respond, would have ranked second in net compensation behind Merrill, which earned $2,167,944.

In a Dec. 16 Bond Commission meeting, commission member and state Sen. Jon Johnson, D-New Orleans, originally proposed that Merrill Lynch, First Commonwealth Securities, and another Louisiana-based underwriter, Sisung Securities, be co-senior managers, according to minutes of the meeting. Landrieu and another Bond Commission member, Louisiana's commisioner of administration Raymond Laborde, resisted that suggestion, arguing that the two firms did not have enough capital.

On Jan. 6, Merrill was designated bookrunning manager and First Boston and Lazard were added as co-senior managers.

Investment bankers at minority-owned firms reached Friday sought to dispel the notion advanced by Lazard that joint-account arrangements are commonplace between a senior manager and a minority-owned firm that does not sell bonds.

"It's news to me that it happens a lot," said Maurice Thomas, vice president in municipal finance at Ward, Bradford & Co., a minority-owned firm based in Atlanta. "A firm might argue that as part of an affirmative action initiative it should get a good share of the bond allocation, but to get the kind of compensation that this firm apparently did when it sold no bonds is another story."

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