An agreement between Merrill Lynch & Co. and Lazard Freres & Co. to split fees from swap transactions also contained a provision that put Lazard, an investment banking and financial advisory firm, on retainer for Merrill Lynch.

The retainer agreement, confirmed by officials at both companies, reportedly paid Mark S. Ferber, formerly of Lazard, and his staff $1 million a year between 1990 and 1992 to help Merrill market swap transactions to issuers. Company officials declined to confirm details of how much money was involved.

The existence of the agreement has raised questions about the ability of a financial adviser to provide objective advice to issuers while simultaneously taking fees from the industry's leading bond underwriter, several industry sources have said.

Officials at Merrill and Lazard have defended the agreement, arguing that every issuer who participated in a swap through the two firms was told of its existence -- including the provisions involving the retainer agreement -- and none viewed it as a conflict of interest.

"There was full disclosure made to me about the arrangement, " said Lee Jackson, treasurer of Boston. "I did not have a problem with it."

The fee-splitting portion of the arrangement between Merrill and Lazard resulted in the firms sharing more than $6 million in fees.

According to finance officials in Boston and the Massachusetts treasurer's office -- two of the four issuers to use the Merrill and Lazard team for a swap --the agreement saved both issuers millions of dollars.

Boston, for example, earned $6.3 million through the swap, according to sources familiar with the transaction. Massachusetts' swaps saved over $10 million, according to an attorney representing First Albany and Ferber.

A spokesman for the state treasurer's office was unable to confirm the amount of savings.

The retainer agreement provided that Ferber or other members of his staff would be paid, in addition to sharing fees on completed swap transactions, for advice on how to structure and market the transactions.

The additional services for which Ferber and Lazard were placed on retainer included designing the structure of interest rate swap products in general and devising new ways in which they could be utilized, according to Ferber's attorney, Wayne A. Budd.

James Wiggins, a spokesman for Merrill, said, "We were paying them for their time. What must be considered in this is how many million of dollars were saved for the issuers that used these swaps."

Wiggins said there were four issuers who executed the swap transactions: Boston, the state of Massachusetts, the New England Medical Center, and a Florida agency that he said he could not identify.

Lazard executives were not paid to go to issuers and solicit new business for Merrill Lynch, Wiggins said. They would receive the additional fee only on swaps on which they worked together. The contract was signed in mid-1990 and renewed in 1991 and 1992. It expired at the end of 1992 and was not renewed.

Budd and Ferber have taken issue with recent reports in The Boston Globe that they say unfairly characterizes the agreements for the two fees as two separate contracts.

They stressed that all of the terms of the relationship between the firms were part of one agreement and were fully disclosed to all issuers involved.

Budd, a senior partner at Goodwin, Procter & Hoar, has been retained by First Albany Corp., where Ferber now works. Budd said in an interview that accusations that Ferber had more than one contract or agreement with Merrill Lynch were false and designed to destroy Ferber's reputation.

Budd said that all of the terms of the agreement were also revealed to Merrill's and Lazard's upper management when the deal was approved in 1990.

The attorney also said that none of the issuers that were financial advisory clients of Ferber's was involved in any of the swap transactions on which fees were split or money from the retainer agreement was paid.

Ferber left Lazard to become co-chief executive officer of First Albany earlier this year. Most of the staff from the Boston office of Lazard Freres have joined Ferber at First Albany.

Since joining First Albany, Ferber has said he is curtailing most of his activities in the municipal marketplace. He still serves as financial adviser for a few municipal clients, including the Massachusetts Water Resources Authority.

Merrill Lynch has served as senior manager on several large financings for the authority.

Ferber and officials at the MWRA have maintained that the underwriters for the authority's deals were chosen independent of its financial adviser.

Robert A. Cerasoli, the state inspector general, has been an outspoken critic of the relationship between Merrill and Lazard. He would neither confirm nor deny that Ferber was being investigated by his office.

"I have very serious concerns, however, regarding apparent or actual conflicts between the MWRA's financial adviser and bond underwriters," Cerasoli said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.