Merrill Lynch & Co. and Lazard Freres & Co. violated the spirit of a 1991 Massachusetts disclosure questionnaire and as a result will not be allowed to participate in two upcoming bond deals, state treasury officials said yesterday.
State officials announced that the firms would not be considered for syndicate slots on a $40 million to $70 million negotiated issue the Massachusetts Water Pollution Abatement Trust is planning for October. And last month they banned the firms from participating in an upcoming $500 million general obligation refunding.
Yesterday's action came after lawyers for the two underwriters defended a fee-splitting contract they maintained between 1989 and 1992 but failed to list on a disclosure form they filled out for the state in 1991.
The two companies argued that the questionnaire did not seem to apply to their private arrangement because the former state treasurer, Robert Q. Crane, was told of the contract in 1990.
Massachusetts Deputy Treasurer Joseph P. Craven said that "there is a basis" for argument that the two companies responded in good faith and in "technical compliance" with the questionnaire. But he said "any reading" of the form should have raised questions about whether the relationship should have been disclosed.
"This belief, combined with our view that it would have been prudent to seek clarification of any perceived ambiguity in the scope of the treasurer's requests for disclosure statements, leads us to conclude that [Merrill Lynch and Lazard Freres] did not respond within the spirit of the treasurer's request," Craven said in a letter to attorneys representing the two firms.
Craven said the two firms would be allowed to bid on an approximately $200 million general obligation competitive bond sale this September and on all other state transactions.
Monica Prihoda, a spokeswoman for Merrill Lynch, said the firm will submit a bid on the competitive sale. Lazard officials did not return calls.
"Unless new facts arise, this-... will constitute our final response in this matter," Craven's letter says. It also says both firms "have always performed to a very high level of technical and professional competence ... and we would welcome the opportunity to work with them in the future."
In December 1991, state Treasurer Joseph D. Malone sent a request for disclosure to all firms interested in participating in state bond sales.
Question three of the request asked firms to list, "any subsidiaries, joint ventures, consultants, lobbyists, sub-contractors, or agents that have relationships," with the responding firm, and "relate in any way with your business with the Commonwealth."
Although Merrill Lynch and Lazard Freres had been involved in a contractual relationship for two years, lawyers for both firms say that section did not pertain to their relationship.
Thomas Kiley, representing Merrill Lynch, and a partner at the Boson law firm of Cosgrove, Eisenberg & Kiley, said that since disclosure about the relationship was made to former treasurer Crane, the firm did not think it had it to be disclosed to Malone.
Since both firms did not disclose the relationship in question three, Kiley said, they did not feel they had to disclose it in question eight, which asks firms if they "shared any fees with any person or entity, whether related or unrelated with respect to your firm's engagement with the Office of the Treasurer."
Craven said, "We believe that any reading [of question eight] of the treasurer's request for disclosure statements would have raised the issue of whether or not the contract ... should have been disclosed. We believe that this action will make it clear to all firms that they should always err on the side of disclosing more information to the issuer."
Between 1989 and the end of 1992, Lazard and Merrill Lynch split fees on swap transactions for issuers -- including the state -- that earned the firms over $6 million in combined fees.
Since those transactions were completed prior to the request from Malone, Merrill Lynch's attorney said, "It was not understood that the disclosure statement sought information as to financial arrangements relating to the general development of Merrill Lynch's derivatives business."
In the response from Lazard, John P. Savarese, a partner at the law firm of Wachtell, Lipton, Rosen & Katz, also wrote that since the transactions were completed before Malone took office they were not disclosed.
From 1991 into the middle of 1992, the two firms, in conjunction with the minority-owned firm of Reinoso & Co., made an unsuccessful joint presentation to the state treasury on an interest rate swap transaction.
Savarese said it was made clear to the state treasury that the two firms were working together on the swap and that materials submitted to the treasury "clearly listed Lazard and Merrill as co-proposers."
Craven said that although the three firms made the proposal together, the terms of the contract and the fees paid to Lazard were not disclosed.
The questionable contract between the two firms was signed by Douglas Hamilton, a former managing director of derivatives at Merrill Lynch, and Mark S. Ferber, a former partner at Lazard.
Ferber -- once one of New England's most successful investment bankers -- left Lazard at the beginning of this year and was named vice chairman of First Albany Corp.
When the board of directors of the Massachusetts Water Resources Authority was informed last month that all parts of the contract between Lazard and Merrill -- a senior underwriter for the authority -- were not disclosed, they voted to fire Ferber and disband the entire underwriting team. At that time, Ferber was the authority's financial adviser.
A week later, First Albany fired Ferber.
Malone said that until Merrill and Lazard explained their relationship, they would not be allowed to participate in state bond sales.
Both firms said it was never their intention to hide from issuers the details of the contract.
However, several sources said two parts of the contract raise questions.
The original contract was signed in December 1989. But in June 1990, a revised and more detailed version was signed by Ferber and Hamilton.
In the revision, the terms of the retainer were described and a clause prohibiting any disclosure of the terms of the contract was included. The Merrill spokeswoman said the reason for the inclusion of the clause was to stop competitors from trying to beat their price.
But terms of another retainer agreement were detailed on the 1991 disclosure report. In that section, Merrill Lynch disclosed that it paid approximately $200 per hour to the law firm of Finnegan, Underwood, Coombs, Ryan & Tierney for advice on corporate matters.