Wall St. Firms Overcharged It, MTA Says : Finance: The agency vows action to recover $8 million, claiming excessive markups by securities brokers from 1991 to 1993. The SEC is probing the allegations.

NEW YORK — Vowing legal action to recover $8 million, Los Angeles County’s Metropolitan Transportation Authority said Monday it believes that two Wall Street investment firms--Lazard Freres & Co. and Goldman Sachs--overcharged it for U.S. Treasury securities from 1991 to 1993.

MTA spokeswoman Andrea Greene also said the Securities and Exchange Commission is investigating the alleged overcharging.

The Times reported last month that Lazard, the MTA’s financial adviser during the period, appeared to have charged the MTA considerably more than market prices for U.S. government notes and other securities known as “strips.”

The MTA--whose officials said that they had not checked to see if the prices were in line with market levels--bought the more than $1 billion in securities as part of complicated transactions that helped lower its debt payments.

Several weeks ago, the MTA’s new chief financial officer, Ronny J. Goldsmith, asked the agency’s current financial adviser, Public Financial Management, to review the purchases. In two memos released Monday by the MTA, the firm said it concluded that Lazard had overcharged the MTA by about $7 million in four transactions in 1992 and 1993 and that Goldman Sachs had overcharged by slightly more than $1 million in a 1991 transaction.

Thomas J. Davies, a spokesman for Lazard, said the MTA had not notified it of any decision to take legal action.

“We continue to believe that our markup for the securities sold was fair and consistent with accepted market practice,” Davies said. (The markup on securities is the investment firm’s profit.)

Michael D. McCarthy, the partner in charge of Goldman Sachs’ municipal bonds department, said: “We do not overcharge our clients, and we have not been contacted by the MTA and its financial adviser.”

Goldsmith said Monday that the findings reflect badly on Wall Street firms. “It’s unfortunate that this has happened, because it paints the entire industry” as being unreliable, she said. “It puts everyone on notice that deals can no longer be done with a handshake.”

Public Financial Management concluded that the alleged overcharging probably cost the MTA itself only about $3.6 million, all from one transaction in 1993. The rest of the money overcharged, the firm concluded, probably should have gone to the federal government in taxes.

Nevertheless, Goldsmith said the MTA will try to recover the full $8 million from the two Wall Street firms. If the Internal Revenue Service determines that money it was owed was diverted to the firms, she noted, it could try to recover the sum from the MTA--and impose penalties that would cost the agency even more.

MTA officials have said Lazard, as financial adviser, had persuaded the agency to forgo competitive bidding on the Treasury securities. Lazard, they said, contended that because it was intimately familiar with each of the transactions, was best suited to pick exactly the right mix of securities for the MTA.

Greene said the agency is adopting new procedures to make sure it is not overcharged by Wall Street in the future.

The agency’s financial adviser no longer will be allowed to buy securities for the MTA, she said, and all Treasury securities will be bought through competitive bidding. In addition, the financial adviser will be required to come up with a list of comparable transactions carried out on the same day, to show that the prices paid were fair.

The MTA and its predecessor agency, the Los Angeles County Transportation Commission, bought the Treasury securities as part of an effort to take advantage of falling interest rates.

The transportation agency would issue new municipal bonds to lock in the lower rates, with the intention of retiring older bonds on which it was paying more, much like homeowners refinancing a mortgage.

But the terms of the old bonds prevented the MTA from paying them off right away. Instead, it sold the new bonds and used much of the proceeds to buy Treasury securities, which were put into an escrow account to guarantee the later retiring of the old bonds.

It was on these treasury securities that the MTA contends it was overcharged.

Lazard consistently has said the prices it charged the MTA were fair when taking into account a reasonable markup. But Public Financial Management told the MTA that in an April, 1993, transaction in which the MTA paid $546.5 million, Lazard had charged “approximately $3.6 million more than fair value.” A reasonable markup, by industry standards, would have been “in the range of $50,000,” the firm said.

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Michael Lissack, a former municipal finance executive with Smith Barney who in recent months has become a self-described whistle-blower, has alleged that Wall Street firms have commonly overcharged municipal governments and agencies for Treasury securities.

And, according to Lissack, much of the overcharges should have gone to the federal government.

That is because federal tax laws prohibit municipal agencies from making a profit by investing the proceeds of tax-exempt municipal bonds. If municipalities take in more income from Treasury securities than they pay out to retire their old municipal bonds, the profit is supposed to go to the IRS.

By charging more than the market price for the treasury securities, however, Wall Street firms would increase the municipal agencies’ costs--and thus appear to eliminate the municipalities’ profits. But in reality, Lissack says, the profits were simply diverted to the brokerage firms.

The SEC and other federal agencies are investigating Lissack’s claims.