CHICAGO -- Wisconsin has launched a review of its contracts with financial advisers in the wake of conflict-of-interest allegations involving Lazard Freres & Co. and First Albany Corp., two advisory firms that have worked for the state.

Lazard was a financial adviser to Wisconsin since at least 1991, while First Albany was named financial adviser earlier this year.

The problems with the companies surfaced last month, when officials at the Massachusetts Water Resources Authority learned that the agency's financial adviser, Mark Ferber, a former partner at Lazard, had maintained a fee-splitting relationship with Merrill Lynch, one of the authority's underwriters.

The relationship, which involved swap transaction the two firms handled, raised questions about Ferber's ability to offer the authority unbiased advice while accepting money from a bond underwriter.

P. Nicholas Hurtgen, deputy secretary of Wisconsin's Department of Administration, said yesterday that given the recent allegations, the state felt it was prudent to examine its relationship with both firms.

"We felt that to make sure everything was being done properly, we would review our relationship," Hurtgen said.

He said that the state's contract with financial advisers will also be reviewed to ensure it contains safeguards against any possible conflicts of interest.

Lazard, represented by then-senior vice president Kenneth Gibbs, was the financial adviser for the state's clean water revenue bond program, which began in 1991 with a $225 million issue priced by a team of underwriters led by Bear, Stearns & Co. and Prudential-Bache Capital Funding.

Hurtgen said the contract with Lazard was terminated after two years when Gibbs joined Ferber and others in leaving Lazard for First Albany in February.

Hurtgen said the state conducted a request for proposal process for a financial adviser for Wisconsin's general debt issues "three or four months ago" and First Albany, represented by Gibbs, was selected from a field of 10 or 12 respondents.

While Hurtgen could not remember the exact terms of the contract, he said contracts typically run for one year with the option to renew for a second year.

Hurtgen said that while Ferber may have attended a meeting with state officials, the state has had no association "whatsoever" with him.

The state official added that to his knowledge neither Lazard nor First Albany had a "dominant" or "discretionary" role in choosing underwriters for the Wisconsin bond issues for which they were advisers. He explained that the selections are made by a panel of three state officials drawn from a pool of about 20 "fairly high level" state officials.

"So that's why we don't see or know of anything that might be improper here," Hurtgen said. "We view [Gibbs'] work and the firms he's been with as excellent."

Gibbs, now a senior vice president at First Albany, said yesterday he appreciates Hurtgen's comments regarding his work for the state. "I look forward to a long and successful relationship" with Wisconsin, Gibbs said.

Kate McDonough, a spokeswoman for Lazard, declined to comment.

Hurtgen said he will conduct the review in conjunction with Frank Hoadley, the state's capital finance director, and the legal counsel to the Department of Administration. He added that the review should be completed by the end of the month and that he does not expect it to be "that complex."

"We don't think that anything improper was going on with the state of Wisconsin," Hurtgen said.

The state is preparing to sell an issue of about $170 million of refunding and new debt for the clean water program. O'Brien Partners Inc. and First Albany are the financial advisers, while Prudential and Bear Stearns are the senior managers.

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