Lazard Freres May Close Its Municipal Finance Division : Securities: L.A. transit agency demands payment for alleged overcharging. Firm denies wrongdoing.


Lazard Freres & Co., one of Wall Street’s most prestigious investment banks, is considering closing its municipal finance division amid mounting allegations of wrongdoing by the unit.

In a related development, the Los Angeles Metropolitan Transportation Authority confirmed Monday that it has demanded that Lazard reimburse it for allegedly overcharging the agency on U.S. Treasury securities in a transaction arranged by Lazard’s municipal finance unit in 1993. In July, a report by an outside consultant to the MTA found that Lazard had repeatedly overcharged the agency on securities sold in connection with a series of complex municipal bond transactions. Lazard denied any overcharging.

The municipal finance unit, which currently has about 20 executives, helps city, state and other public agencies issue municipal bonds and other securities and advises them on financial matters. Lazard is one of several Wall Street firms that in recent years have been caught up in allegations that their municipal units defrauded public agencies.

On Monday, word spread on Wall Street that Lazard’s municipal finance executives had been told that senior management was considering closing the unit. Sources said executives were told it would be prudent to start sending out resumes.


In a statement read by a spokeswoman, Lazard said: “As a result of changes in the municipals marketplace, we are conducting a comprehensive review of all of our alternatives with respect to our municipals business. We expect to be making decisions in the near future based on that review and have so informed our employees.”

A source close to the firm said closing down the unit was one of the options being considered.

Several sources, however, said reasons for the review had little to do with the state of the municipal bond market, and much with allegations that have brought financial liability and severe embarrassment to Lazard. Asked about this, Lissa Perlman, a spokeswoman for Lazard, said the firm’s “recent experiences” helped spark the review, but she declined to elaborate.

Robert E. Poll, managing director in charge of the municipal unit, did not return phone calls seeking comment Monday.

On Oct. 26, Lazard and Merrill Lynch & Co. agreed to pay $24 million in fines and penalties to settle civil charges by the Securities and Exchange Commission, federal prosecutors and several states. They neither admitted nor denied allegations that a former Lazard executive who was supposed to give impartial advice to municipalities was taking payments under a secret contract with Merrill to send it business.

The former Lazard executive, Mark S. Ferber, was indicted on federal criminal charges. His lawyer said Ferber is innocent and will fight the charges.


Late last year, Lazard and Merrill agreed to pay the District of Columbia $3.6 million, without admitting wrongdoing, in connection with Ferber’s advice to the district. In 1992, Kentucky officials complained to Lazard in a letter, charging that the firm had made “false statements” and overcharged it on Treasury securities in a Kentucky Turnpike Authority bond issue. Lazard denied wrongdoing in the Kentucky deal.

Lazard is home to investment banker Felix G. Rohatyn, a noted adviser to major corporations who won renown for helping New York City stave off bankruptcy in the 1970s. In terms of capital, Lazard isn’t one of Wall Street’s biggest investment banks. But its clients include many Fortune 500 companies and it has played a disproportionately large role in advising companies in the recent huge wave of mergers and acquisitions.

Earlier this year, Lazard, a partnership, announced that it was changing its status to become a limited liability company. The move reduces individual partners’ personal liability in the event of lawsuits. It was widely viewed as a step to protect Lazard partners as legal action against the municipal division mounted.

In July, a consultant to the MTA found that Lazard had overcharged it by about $7 million on Treasury securities sold in four transactions between 1991 and 1993. The SEC is investigating the transactions.

Andrea Greene, an MTA spokeswoman, said the agency had sent a letter to Lazard, demanding payment of well in excess of $1 million in connection with one of the transactions. She said the letter made clear that the MTA intended to file a lawsuit if Lazard doesn’t pay. Lazard hasn’t responded yet. Greene said a law firm is evaluating other potential claims against Lazard from the transactions.

Perlman said Lazard had no comment on the MTA’s demand.