MTA Joins Lawsuit Alleging Overcharges

After months of indecision, the Los Angeles County Metropolitan Transportation Authority announced Tuesday that it is taking legal action against Wall Street investment bank Lazard Freres & Co. for allegedly overcharging the agency by millions of dollars on U.S. Treasury securities.

But because the MTA did not act until after a private whistle-blower filed suit, the county may miss out on a good chunk of any possible damage awards.

The MTA said it is joining in the whistle-blower’s lawsuit against Lazard, filed in Los Angeles County Superior Court in August. Because the whistle-blower, Michael R. Lissack, a former Smith Barney executive, filed the lawsuit first, he stands to receive up to one-third of any money recovered. The suit seeks treble damages of at least $14 million.

The Times in June reported evidence that Lazard, while acting as the MTA’s financial advisor, had charged the agency substantially above the publicly quoted market prices for securities that had a face value of more than $1 billion in 1992 and 1993. The MTA commissioned a study by its new financial advisor, Public Financial Management, which on June 26 estimated that Lazard had overcharged the agency as much as $7 million. It found that the agency, however, only lost about $3.6 million, because most of the additional alleged overcharge should have gone to the federal government in taxes.

The Times story reported that Lazard had persuaded the transit agency not to seek competitive bids for the securities, but to buy them directly from Lazard. The securities were purchased as part of a complicated financial strategy under which the MTA sought to lower its costs by taking advantage of falling interest rates.

Lissack, a whistle-blower who has made allegations of widespread corruption in the municipal bond business, filed the lawsuit under the California False Claims Act. The law entitles private citizens to file lawsuits if they believe government agencies have been defrauded. Individuals are entitled to up to one-third of any recovery.

As required by the law, the suit was filed under seal. Its existence was not made public until Tuesday.

County Supervisor Zev Yaroslavsky, a member of the MTA’s board of directors and head of its legal committee, said the agency had waited to file a lawsuit because it had attempted first to negotiate a settlement with Lazard.

He said the MTA board decided to participate in Lissack’s suit because “we want to send an unmistakable message to the investment banking community that you can’t and won’t get away with cheating and stealing from a public agency.”

Legal experts said that once Lissack’s False Claims Act suit was filed, the MTA no longer had the option of filing a suit on its own.

Lazard said the firm “vigorously denies the allegations” of overcharging. “We also believe that, as financial advisor to the [MTA], we conducted ourselves in an entirely professional manner.”

Stung by allegations of wrongdoing, Lazard announced in December that it was shutting down its municipal finance department. The move came after Lazard in October agreed to pay $12 million in fines and penalties to settle civil charges, without admitting or denying wrongdoing, that a former executive who was supposed to give impartial advice to municipalities was taking secret payments from another Wall Street firm to send it business.