The Investment Banker Who Played By His Own Rules

In the world of public finance, Mark S. Ferber enjoyed an ostensibly enviable position. He was financial adviser to a Massachusetts water authority, the state of Michigan, and the city of Washington, all of which relied on him to help choose which firms would underwrite muni-bond issues. At the same time, Ferber was an investment banker, most recently for First Albany Corp., which underwrites muni issues. He was previously employed at Lazard Fr res & Co., where he entered into a fee-splitting contract with Merrill Lynch & Co. Lazard and Merrill are also muni underwriters.

Over the past several months, these tangled relationships have caused big trouble. In July, the Massachusetts Water Resources Authority fired Ferber, First Albany, and Merrill Lynch because their relationships, says MWRA Executive Director Douglas B. MacDonald, "created the appearance of a conflict" and "compromised the integrity of our bonds." A week later, First Albany fired Ferber, says the firm. Officials in Michigan and Washington haven't expressed concerns about similar conflict-of-interest issues, although Ferber no longer works for either.

Ferber did nothing illegal by acting as a financial adviser while working for securities firms. His clients even say his advice saved them money. But his story shows how, in the lightly regulated world of muni finance, it's easy for investment bankers to play by their own rules. Securities & Exchange Commissioner Richard Y. Roberts says Ferber's activities "violate everything that a financial adviser is supposed to be about: impartiality, objectivity, third-party advice."

Ferber denies any wrongdoing. About the fee-splitting contract with Merrill, he says: "The contract, as reviewed at the time by Lazard's general counsel and as drafted by a major New York law firm, did not violate any laws, regulations, ethical standards, or fiduciary duties owed by this or any other financial adviser." Lazard's comment: "The contract clearly envisioned disclosure to Mr. Ferber's clients." Lazard says that "he assured us that he did so."

Ferber began his career as budget director for the Massachusetts Senate's Ways & Means Committee in 1979. In 1982, he jumped to Kidder, Peabody & Co. as a muni-bond specialist. Boston Mayor Flynn appointed Ferber head of a financial task force and rewarded him with a plum: Kidder was named the city's senior bond underwriter. Ferber went on to become the state's most powerful investment banker. In 1985, he became the financial adviser to the MWRA, a huge muni issuer. He helped choose underwriters for $3 billion in munis to clean up Boston harbor.

Ferber was also an intrepid fund-raiser for politicians who hired him for bond work. One investment banker remembers Ferber arranging for the banker to meet with Boston's mayor at the time, Raymond L. Flynn. Just before the meeting, Ferber asked the banker for a $3,000 contribution for Flynn.

Due to Ferber's multiple roles, investment bankers sometimes found it difficult to resist his fund-raising entreaties. Says one irate banker: "You had to kiss up to Ferber or he's going to ding you because you didn't help his client." Says Wayne A. Budd, Ferber's attorney: "Mark Ferber never stated or implied, directly or indirectly, that the failure to contribute to a candidate of his choice would have any adverse consequences of any kind."

Ferber's troubles began in early July, when the MWRA learned details about his contract with Merrill Lynch, then one of the agency's senior underwriters. Under the contract, Ferber was compensated for selling swap contracts, which can cut interest costs, to municipal officials. Between June, 1990, and January, 1993, Ferber received $2.8 million from Merrill, says the MWRA's McDon-ald. Ferber, he says, disclosed his Merrill relationship, but not his compensation. "When you're whispering in our ear as our fiduciary, you can't go sign a secret treaty," says McDonald. Merrill insists the contract was "proper, ethical, and legal." First Albany declined comment. The Massachusetts inspector general is investigating Ferber's MWRA dealings.

ON HOLD. Ferber was treated more kindly by officials in Washington. While at Lazard, he served as the co-financial adviser to the city in 1991 and 1992. He recommended that the city do two swap deals with Merrill, says Ellen M. O'Connor, Washington's deputy mayor for finance. O'Connor says Ferber told her that he had "some arrangement with Merrill," but Ferber didn't tell her about his compensation. Does O'Connor view Ferber's Merrill relationship as a conflict of interest? "I don't know enough about the financial markets to make a statement about that," she replies. O'Connor and Merrill say they didn't pay Ferber any extra fees for swaps.

In Michigan, Ferber was a financial adviser from August 1, 1991, until July 31, 1992. During that time, the state hired Merrill as senior underwriter on one $540 million bond issue, according to Securities Data Co., but didn't use Merrill for swaps. According to Ferber's attorney and Merrill, Ferber told state officials that he had an "economic rela- tionship" with Merrill but gave no specifics because the deal was "a private contract between private business parties."

Asked about a possible conflict between Ferber and Michigan, State Treasurer Douglas B. Roberts declined to comment. He says that while he was satisfied with Ferber's performance, Ferber and First Albany are no longer under contract with Michigan.

For now, Ferber's career is on hold. His next major role may be on Capitol Hill: testifying this fall before congressional hearings on the muni market.

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