The Massachusetts Water Resources Authority, facing new reports of business ties between its financial adviser and one of its underwriters, plans to disband its bond syndicate, dismiss its financial adviser, and start from scratch with a competitive bidding process, authority officials said yesterday.

Philip N. Shapiro, chief financial officer of the authority, said he expects the board of directors to approve the measures at a board meeting tomorrow.

The move comes as the authority's financial adviser, Mark S. Ferber, detailed a consulting agreement between his former firm. Lazard, Freres & Co., and First Albany Corp., a former member of the MWRA syndicate and the authority's current financial adviser.

Ferber, who earlier this year moved to First Albany, previously disclosed that Lazard maintained a fee-splitting arrangement with Merrill, Lynch & Co. for swaps not associated with the MWRA. Merrill Lynch was one of three senior managers on recent MWRA deals.

The disclosures have prompted debate among state officials about the ability of Lazard and First Albany to provide the MWRA with unbiased advice while simultaneously accepting fees for other work from authority underwriters.

That debate prompted state Inspector General Robert A. Cerasoli to launch an investigation into all aspects of MWRA financings. Yesterday, for the first time since the investigation began, a senior member of the authority's executive committee said there were portions of the contract between Lazard and Merrill Lynch that were not disclosed to committee members in a timely manner.

"I have carefully reviewed the agreements between Lazard and Merrill, important aspects of which were not made known to the MWRA in any fashion, prior to June 30, 1993," said MWRA executive director Douglas MacDonald in a letter to Cerasoli. "The confidential agreements between Merrill and Lazard illustrate that such agreements, if undisclosed, create at the very least, unacceptable perceptions.

In a letter to the MWRA yesterday, Ferber recommended that the authority cancel its contracts with the syndicate and with First Albany and award all financial service contracts through competitive bidding.

The letter, addressed to MacDonald, said the MWRA should adopt "a new public bidding process for all enterprises seeking to provide financial services to the authority."

Shapiro said the authority will begin accepting bids from qualified firms soon after the board acts tomorrow.

The MWRA has issued more than $2.2 billion in bonds for the cleanup of the Boston Harbor, the construction of the Deer Island Sewer plant, and other water and sewer projects in the state.

Currently the authority uses Bear, Stearns & Co.; Goldman, Sachs & Co.; and Merrill Lynch as senior managers for debt on a revolving basis.

Co-managers are M.R. Beal & Co., Lehman Brothers, and Morgan Stanley & Co.

Ferber has been the authority's financial adviser for the past 10 years. In that time, he has been employed at Kidder, Peabody & Co.; The First Boston Corp.; Lazard Freres, and now First Albany.

In his letter to Cerasoli, MacDonald said, "In our judgment, the provisions in these undisclosed agreements between our financial adviser and an investment banking firm that was heavily involved not only in underwriting our debt issues but also in entering swap agreements with our agency are inconsistent with the manner in which we believe our business should be conducted."

Ferber has been reviewed and reappointed to the post three times.

Ferber said his letter was not intended to serve as a resignation and that First Albany "will look forward to participating in a competitive bidding process for future financial services."

At tomorrow's board meeting, Shapiro said he will also introduce a new set of fiduciary guidelines for firms that provide services to the authority.

With these new guidelines in place, we hope to set a standard of excellence similar to the one we have set dealing with secondary disclosure." Shapiro said.

In a letter to MacDonald, Cerasoli questioned whether Ferber would be able to provide the authority with independent financial advice considering separate business relationships that Ferber had with two of the authority's underwriters.

"It is apparent that Lazard Freres' advice played a significant role in MWRA decisions on matters such as the timing and structure of financing deals and underwriter selection." Cerasoli said. "The notion that the MWRA's financial adviser, while ostensibly providing impartial assistance to the MWRA in underwriting matters, was at the same time accepting payments under an unwritten. undocumented side-deal with a member of the MWRA's underwriting team is unacceptable."

Ferber said he hoped the upcoming competitive bidding process would end the controversy surrounding his business agreements with First Albany and Merrill Lynch.

"This action is intended to lay to rest all of the innuendo and false charges in an effort to insure the continued high reputation of the MWRA in the municipal marketplace." Ferber said.

From late 1990 through the end of 1992, Lazard was under contract with Merrill Lynch to promote complicated swap transactions and then split fees on those transactions.

The firm was also paid a reported $1 million per year on retainer for services that Ferber and his staff provided to Merrill in structuring and marketing the swaps Lazard worked on.

The contract did not apply to MWRA swaps.

"For the 10 years I have worked as the authority's financial adviser, I was a part of every pricing of bonds except the two that included the Merrill swaps," Ferber said.

Authority officials said the MWRA used Merrill Lynch swaps to save ratepayers $37 million.

Over the two years of the contract between Merrill Lynch and Lazard, the firms split more than $6 million in fees generated by swaps for other issuers.

Yesterday, Ferber confirmed that while he was employed at Lazard, First Albany paid him and his staff $10,000 a month starting in the summer of 1991 to review the firm's corporate structure.

The meetings between Ferber and First Albany focused on improving First Albany's compensation plans, financial reporting, cost allocation, and the firm's competitive position as a regional investment bank. according to Wayne Budd, an attorney representing Ferber and First Albany.

The fees from both of these contracts were paid directly to Lazard and not to Ferber.

Ferber and MVMA officials denied the relationships affected authority business decisions.

"The financial adviser made no decision about which firms were allowed to make oral presentations to the selection committee," Ferber said. "I was present at the oral presentations to ask certain technical questions, but that was the extent of my involvement."

Those questions included to what other credits the underwriters compared the MWRA, whether firms were submitting accurate spread expectations, deal structuring, and whether a firm had sufficient capital to participate in a deal.

An official at Bear Steams, one of three firms chosen in 1988 and selected again in 1991, said the process was an extremely rigorous one.

"The process was long and very thorough." said Daniel J. Keating. a senior managing director with Bear Stearns. "It was heavily oriented towards the marketing of the bonds."

Keating said that at no time did he get the impression that any member of the selection committee was steering business to one firm or another.

Ferber said that in the case of the 1991 rebidding for firms to be part of the MWRA's syndicate, two firms - M.R. Beal and First Albany - were exempted from a second round of oral presentations.

He said that decision was made during the board's and the selection committee's preliminary discussion, before the financial adviser was involved.

Shapiro said that the firms were exempted from the second round because of their success in marketing authority bond issues.


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.