Working for nearly five years for investment banker Lazard Freres & Co., Ferber was applauded by many for pulling off almost Milkenesque deals. But federal and local authorities are investigating allegations that he was engaging in a conflict of interest, while working for such clients as the U.S. Postal Service and local government agencies around the nation. Ferber’s job was to often advise those agencies on how to raise money by floating bond issues. That meant giving his federal and local government clients impartial advice about which bond dealers to hire and how to pay the lowest interest rates. But authorities have alleged that at the same time he was supposedly giving independent advice, he had struck a confidential side deal with Merrill Lynch, one of America’s leading municipal bond dealers, to use his political contacts to help it sell a new type of bond package. In return, a state official has said, Merrill Lynch paid Ferber and Lazard Freres $2.8 million over three years in consulting fees. They have all denied any wrongdoing.
The inspector general of Massachusetts dug into the Lazard-Merrill Lynch contract last year after The Boston Globe first exposed it. In a recent report, Inspector General Robert Cerasoli alleged a “quid pro quo” between Merrill Lynch and Lazard’s Boston office, which was headed by Ferber. While working as advisers to the Massachusetts Water Resources Authority, he charged, Ferber and Lazard gave unfair advantage to Merrill, which was seeking additional bond-underwriting business from the authority. The authority was in the midst of raising some $6 billion to finance a cleanup of Boston Harbor. Among other things, Cerasoli contended that Ferber’s office “coached” Merrill on what answers to give when applying for bond business. The information, Cerasoli said, helped Merrill land lucrative fees. In return, according to Cerasoli, Merrill was allegedly asked to deliver unrelated bond deals to Ferber that could generate profits for both. The water agency fired both Ferber and Merrill Lynch last year.
Spokesmen for both Lazard and Merrill Lynch claim there was nothing wrong with their deal. Both firms deny any quid pro quo. Ferber, they say, was ordered in writing to tell his financial-advisory clients about the Merrill deal. if he failed to do so, the firms maintain, it was Ferber’s fault alone. Jim Wiggins, a Merrill spokesman, concedes that while his firm does not believe it did anything wrong, “with hindsight, we might have done this differently,” by, for instance, requiring more explicit disclosure. Ferber’s lawyer, Thomas E. Dwyer Jr., says that Ferber did disclose “the substance” of his deal with Merrill to clients, not one of whom, Dwyer says. was harmed by the relationship. Dwyer says Ferber is being made a “scapegoat.”
After working as a budget adviser to the Massachusetts state Senate, Ferber joined the municipal bond departments at Kidder, Peabody and then First Boston. In 1988, he was recruited to take over Lazard’s Boston office by partner Michael Del Giudice, a former chief of staff to New York Gov. Mario Cuomo. Early last year Ferber and most of his staff quit Lazard and moved to First Albany Corp. Ferber left First Albany last summer after questions about his activities at Lazard began to mount.
What has sent a chill across the bond industry are federal criminal and civil investigations based in Boston, which insiders fear will expand to include bond deals around the country. Already Ferber’s dealings with agencies in Massachusetts, Indiana and the District of Columbia have attracted the attention of investigators; NEWSWEEK has obtained a Securities and Exchange Commission subpoena asking for information on Ferber, Lazard and Merrill Lynch, which was sent to the Indianapolis city controller’s office in January. In a 1992 document, Lazard reported that Ferber had also “supervised” bond deals in eight other states.
Details of Ferber’s involvement in Arkansas are particularly intriguing. In 1989, Lazard received a $150,000 adviser’s fee from the Arkansas Development Finance Authority (ADFA) which used the bond market to raise hundreds of millions of dollars. Wooten Epes, the ADFA chief who hired Ferber, said Ferber’s job was to help ADFA design a new agricultural bond issue, not to help it choose brokers. But a Merrill Lynch memo describes how Ferber, in a 1989 conversation, reminded a Merrill official “that he delivered Arkansas.” In December 1988, when Ferber was still on the ADFA payroll, Merrill Lynch was selected without competitive bidding as top underwriter on a $6.1 million ADFA bond issue. A source close to Merrill Lynch contended that Ferber’s supposed influence in Arkansas was not borne out by the firm’s relatively small Arkansas fees.
Some industry experts say it is only a matter of time before investigators start looking into other bond dealers around the country. Both Congress and Wall Street recently moved to curb the role of political influence in the bond market. But reform efforts are likely to come too late to avoid an industry upheaval as the Ferber investigation reaches maturity.
