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Merrill Lynch, Lazard to Pay $20 Million to Settle SEC Charges

October 26, 1995 GMT

BOSTON (AP) _ An investment advisor was indicted Thursday and two leading securities firms reached the largest settlement of its kind in a government crackdown on fraud in the municipal bond market.

Merrill Lynch & Co. and Lazard Freres & Co., without admitting wrongdoing, agreed to pay more than $20 million to settle charges they failed to disclose to their clients that the investment firms had a fee-splitting arrangement. Merrill said the settlement would not restrict either company’s business in the $1.2 trillion market for municipal bonds.

In addition, Mark Ferber, a former partner in Lazard, was indicted on 63 criminal counts of fraud and corruption. He also was charged with extortion, accused of threatening to ``hurt″ Merrill if it stopped making payments.

The cases symbolizes the ``changing face of crime in the 1990s,″ Attorney General Scott Harshbarger said.

``You no longer need a gun or a knife to hurt people today. A pen, a financial spreadsheet can be used as ruthless and devastating weapons to victimize the innocent on a scale that is hard for the average working man or woman to imagine,″ he said.

The state of Massachusetts and the Massachusetts Water Resources Agency had hired Ferber as an adviser to arrange financing for projects such as the cleanup of Boston Harbor. He also was hired by the Michigan Department of Transportation, the District of Columbia and the U.S. Postal Service as a financial adviser.

The U.S. attorney’s office in Boston said Ferber took millions of dollars in payments for Lazard from Merrill, while he recommended that local governments hire Merrill to execute interest rate swaps.

The swaps are financial arrangements designed to minimize investor risk arising from sudden changes in interest rates.

Ferber ``defrauded those entities of their right to his honest services and of the millions of dollars in financial advisory fees that they had paid to him for his services,″ Deputy U.S. Attorney Karen Green said.

In a statement, Ferber’s attorney, Thomas Dwyer Jr. called Ferber a ``scapegoat for the perceived ills of the $200 billion national municipal finance industry.″

`Mark Ferber will plead not guilty because he is innocent of every single one of these outrageous charges ... The indictment has been fueled by falsehoods and misleading circumstantial evidence supplied by a few jealous competitors and a former employer in need of a scapegoat,″ the statement said.


In Washington, the Securities and Exchange Commission announced a settlement of administrative charges with Merrill and Lazard. The SEC agreement, which involves only civil charges, is part of a broad settlement with authorities in Massachusetts and the District of Columbia.

Overall, Merrill and Lazard each agreed to pay $12 million to settle charges brought by all agencies, spokesmen for both firms said. That amount includes a total of $3.6 million the firms have already paid to the District of Columbia earlier this year.

The settlement is the largest of its kind in the municipal finance business. It is a major development in the SEC’s ongoing crackdown on illegal practices in the municipal bond market, which raises money to build highways, schools, sewage treatment plants and other public facilities.

Both Lazard Freres and Merrill Lynch, in prepared statements, said they relied Ferber to disclose the fee-splitting arangement to municipal clients. However, federal authorities said neither firm ensured that the disclosures were made.

``What this settlement provides is that Merrill should have taken additional steps to make sure that Lazard disclosed the contract to its financial advisory clients,″ said James Wiggins, a Merrill spokesman.

Both firms are cooperating in the investigation, Assistant U.S. Attorney Brian O’Connor said.

The SEC case charged both firms with violating rules of the Municipal Securities Rulemaking Board, or MSRB, which require brokers ``to deal fairly with all persons and not engage in deceptive, dishonest or unfair practice.″

The SEC said it found that in 1990, Lazard and Merrill entered into a contract to split fees from successful joint marketing of interest rate swaps. Merrill Lynch paid Lazard $5.7 million between September 1990 and November 1992, with about $3.2 million of those payments coming from the fee splitting arrangement, the SEC said.

The Massachusetts Water Resources Authority, or MWRA, and District of Columbia ``were not fully informed of the contract″ as well as a 1989 agreement between Merrill and Lazard in a municipal bond deal in Broward County, Fla., the SEC said.

``The contract created at least a potential conflict of interest for Lazard Freres that should have been disclosed to the MWRA and D.C.,″ the SEC said.

Ferber’s attorneys, Katherine Weinman and Thomas Dwyer Jr., did not return calls.

However, Dwyer has said in the past that Ferber had told Massachusetts Water Resources Agency officials that he and Merrill were working together on bond deals. He also has said Ferber never violated the fiduciary responsibility placed in him by the MWRA.

If convicted, Ferber faces maximums of five years in prison on each of 27 mail and wire fraud counts and 21 counts related to wrongly using interstate commerce, 10 years in prison on each of 13 gratuity counts and 20 years in prison for the attempted extortion count.

He remained free Thursday pending his arraignment, which was not immediately scheduled. Ferber, of Concord, has an unlisted telephone number and could not be reached for comment.