SECURITIES : 2 Banks to Pay $24 Million in Fraud Case : Settlement: Lazard Freres, Merrill Lynch neither admit nor deny charges they defrauded four public agencies.

In the biggest case so far in a federal crackdown on fraud in municipal finance, Wall Street investment banks Lazard Freres & Co. and Merrill Lynch & Co. agreed Thursday to pay a total of more than $24 million to settle civil charges that they defrauded four public agencies.

The U.S. attorney’s office in Massachusetts also obtained a criminal indictment against a former Lazard executive, Mark S. Ferber. Ferber allegedly was at the center of a scheme whereby Merrill secretly paid him and Lazard a fee to funnel business to Merrill from 1990 through 1993. Merrill also secretly shared fees with Lazard from the business it received.

Lazard and Ferber allegedly took the money even though Ferber was supposed to have been acting as an impartial adviser to municipal agencies on getting the best terms in complicated bond deals, law enforcement officials said.

The civil and administrative charges were filed against the investment firms by the Securities and Exchange Commission, federal prosecutors and the Massachusetts attorney general’s office. Both firms settled without admitting or denying the allegations.

The settlement comes as the SEC and federal prosecutors are focusing on widening allegations that big Wall Street firms have illegally profited in their dealings with municipal and state agencies.

Merrill and Lazard currently are under separate investigations by the SEC in regard to dealings with municipal agencies in Southern California. Both deny any wrongdoing.

Earlier this year, Merrill and Lazard agreed to pay the District of Columbia more than $3.6 million to settle a claim stemming from the secret pay arrangement.

Juan Marcel Marcelino, the SEC’s district administrator in Boston, confirmed that additional big cases are likely to be filed. He said the crackdown “clearly demonstrates our commitment to ensuring the integrity of the municipal markets.”

Federal authorities alleged that Ferber and Lazard were under contract to serve as impartial financial advisers to four governmental agencies: the Massachusetts Water Resources Authority, the District of Columbia, the Michigan Department of Transportation and the U.S. Postal Service.

Based on advice from Ferber, the four agencies hired Merrill to perform services such as managing new municipal bond offerings and arranging interest-rate swaps.

Ferber’s role as adviser to the agencies was to ensure that they got the best financial terms on these transactions. The SEC and U.S. attorney’s office alleged that neither Merrill nor Lazard ever disclosed to these clients that they had the secret contract and that payments were being made.

In all, Merrill allegedly paid Lazard nearly $5.7 million under the arrangement.

The two firms will each pay slightly more than $12 million in penalties, including restitution to the affected agencies and a variety of civil penalties to the federal government and Massachusetts.

Both Lazard and Merrill said they had cooperated with the investigations.

In a statement, Merrill said it had terminated the arrangement in early 1993, before authorities began investigating.

Merrill contended it had been victimized by Lazard because “Merrill relied on Lazard to make proper disclosures [of the arrangement] and was told such disclosure had been made.”

Lazard, in turn, said it was victimized by Ferber, who it said “actively misled” the firm, and that no one in Lazard’s New York headquarters knew of the arrangement with Merrill.

Ferber’s attorney, Thomas E. Dwyer Jr., said in a statement that Ferber is “innocent of every one of these outrageous charges” and would plead not guilty.

As reported, the SEC is investigating Lazard’s role as financial adviser to the Los Angeles Metropolitan Transportation Authority after an MTA internal inquiry turned up evidence that Lazard had overcharged it on treasury securities sold in connection with several municipal bond issues. Lazard has strongly denied overcharging the agency.

The SEC is also conducting a major investigation of the Orange County bankruptcy, including whether Merrill Lynch and other firms failed to publicly disclose known risks associated with municipal bonds they helped the county to issue.

A Merrill spokesman said, “We continue to believe that the firm acted properly at all times” in its dealings with Orange County. The firm also faces a massive civil suit filed by the county.