New York City finance officials singled out Fleet Securities Inc. for a special allocation of bonds during a recent sale, despite an ongoing city investigation of the firm and recent demotion from its co-manager slot, a city official and Wall Street sources confirm.

The city directed the senior manager of one deal, First Boston Corp., to allocate Fleet Securities, a member of the selling group, about $4 million of bonds, more than other selling group members and even some co-managers, according to city and Wall Street officials.

It is common practice for senior managers and co-managers to receive the bulk of the bond allocation. One city official said Fleet earned the additional bonds based on its performance during several recent issues. Several securities professionals, however, say that the arrangement was unusual given the amount of bonds allocated to more senior members of the syndicate.

The city's Department of Investigation is probing Fleet Securities, its banking affiliate, and city Comptroller Elizabeth Holtzman. On May 13, New York City Mayor David N. Dinkins demoted Fleet to the lowest category in the city bond underwriting syndicate from the lucrative position of co-manager.

The mayors announced the decision amid reports that Holtzman's office had recommended Fleet as a co-manager several months after the firm's banking affiliate had loaned Holtzman's Senate campaign $450,000. The securities firm was appointed to the syndicate as a co-manager in March.

Holtzman, whose senate bid was unsuccessful, has denied any wrongdoing and said that her staff recommended Fleet securities for the underwriting slot. She later admitted that she should have been made aware of the firm's nomination to the syndicate. Holtzman said she only focused on the appointment of senior managers during the selection process.

The mayor, in a letter to Holtzman announcing the demotion, said, " The appearance of conflict in the elevation of Fleet Securities could pose a threat to [the city's] good reputation." The mayor said that Fleet Securities is a reputable firm and that his office had found no evidence of wrongdoing. The New York City Department of Investigation is conducting an investigation into the matter.

Michael Geffrard, director of the city's office of Public Finance, said this week that city finance officials representing both the mayor as well as the comptroller recently chose to increase Fleet Securities' allocation as a way of rewarding the firm for showing strong interest in selling city bonds, especially those bonds that held little interest for investors.

The city's selling group, made up of 50 to 100 firms, according to one city finance official, is on the lowest tier of the city's underwriting team.

Geffrard said he and officials representing the comptroller agreed to increase Fleet's share of a bond offering above the levels awarded to most of the selling group members during at least one bond sale, a $775 million offering sold on July 20 by an underwriting team lad by First Boston.

At issue is Fleet's performance during the last several city bond deals,geffrard said. Fleet had out-performed other members of the syndicate by placing what city officials have called high-quality orders for bonds. These orders included bonds that were selling well to investors and those that were not, Geffrard said.

"This is a performance-based account and if you perform, you get rewarded," Geffrard said.

The city structured the $775 million issue to include only $286 million of fixed-rate current interest, or plain-vanilla, general obligation bonds. Derivatives and variable-rate debt made up the lion's share of the issue, which offered a maximum yield of 5.990%.

Many institutional investors said they found the deal too expensive. A city official speaking on the condition of anonymity said that to maintain the transaction's 5.90% yield, the city attempted to sell the current interest bonds to retail investors.

As a result, firms like Fleet Securities, which have a strong retail base, were logical choices to place the securities with these investors, the city official said.

Geffrard said he did not recall exactly how many bonds Fleet received, nor could he provide documents describing how many bonds the city awarded to each firm in its syndicate.

But on co-manager in the city deal disagreed with Geffrard's assessment that Fleet should have been singled out for special treatment. The co-manager, who spoke on the condition of anonymity, said, "Fleet may be able to sell the bonds, but everybody puts in those kind of orders."

Another underwriter said that while selling group members are often awarded bonds that are difficult to sell, city officials have been known to "take care" of these underwriters for any number of reasons.

Several underwriters at municipal bond firms that serve as city co-managers and selling group members say they also aggressively market city bonds to retail and institutional investors, but received no more than about $2 million in bonds during the First Boston deal. At least one selling group member received no bonds during the deal.

Roger Anderson, acting deputy comptroller for finance, who now represents Holtzman in city debt management issues following the departure of Deputy Comptroller Darcy Bradbury, said this week that he would provide documents that would describe how bonds were distributed to various members of the city's bond syndicate during the city's last three bond sales.

But yesterday Anderson referred all questions to the comptroller's public relations office, which did not return telephone calls.

One city finance official, who spoke on the condition of anonymity, said the city told underwriters to increase the share of bonds to Fleet during the First Boston-led transaction to about $4 million, after the firm placed orders with the city to sell about $25 million of bonds.

The city official said the allocation was higher than the $2 million in securities that would have otherwise been awarded to Fleet as a selling group member.

A First Boston spokeswoman said the firm had no comment on the matter.

Underwriting sources, also speaking on the condition of anonymity, said the the city did not award additional bonds to Fleet during its May 18 offering of $496 million of general obligation bonds underwritten by a management group led by Bear, Stearns & Co.

Bear Stearns official would not comment on the matter. But sources with knowledge of the transaction said the city gave no special allotment awards to Fleet during the sale, which was the first city deal after Fleet's demotion to the selling group.

Thomas L. Lavelle, a spokesman for Fleet Financial Group Inc., who would not comment directly on Fleet's role in recent New York City financings, said "Fleet has been successful in distributing New York City bonds for [many] years."

The city's selling group is reserved for firms that do not quality for the city's management group of senior managers an co-managers, but the firms in the selling group are considered capable of selling city bonds. Distribution of city bonds is essential to the success of a city deal, especially since New York City is the nation's largest municipal bond issuer.

Firms placed in the selling group do not always receive bonds on new issues. In general, bonds are allocated first to senior managers and co-managers. Even then, there are times when co-managers do not receive the amount of bonds they requested, especially when the deal is going well.

But when the selling groups does get bonds, it's often an indication that the management bracket is having difficulty selling the issue or the market is volatile.

The selling group is also the least profitable underwriting class largely because these firms receive the lowest share of bonds from the city --about 10% of the issue--and as a result cannot earn fees by selling securities to investors or trading securities in the secondary market.

The selling group members also do not receive expense reimbursements and managements fees.

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