Brokerage to Settle MTA Suit, Sources Say

Investment banking firm Lazard Freres & Co. has agreed to pay $9 million in damages plus attorneys’ fees to settle a long-running legal fight over allegations that it overcharged the Metropolitan Transportation Authority for investments in U.S. Treasury securities, sources said Thursday.

The MTA Board of Directors will meet in closed session Monday to consider whether to accept the settlement with Lazard Freres, which served as the agency’s financial advisor from 1991 to 1994.

The case, which was to go to trial this fall, has been closely watched because of allegations by former municipal finance executive Michael R. Lissack that Wall Street investment firms commonly overcharged governments and various agencies for Treasury securities.

Lazard Freres is alleged to have overcharged the MTA by $3 million for Treasury securities purchased in connection with the agency’s 1993 refinancing of $560.5 million in bonds issued for rail construction projects.

Rather than having to pay off outstanding bonds before their maturity, the MTA used the proceeds from the refinancing to buy the Treasury securities. Any excess profit on such deals is supposed to be turned over to the U.S. Treasury instead of the brokerage house.

County Supervisor Zev Yaroslavsky, a member of the MTA board, said he had not seen details of the settlement but insisted that no agreement with Lazard Freres would be reached without “making them pay a price.”

“It was an act of betrayal,” Yaroslavsky said. “They were our financial advisor, and they took advantage of that position to take advantage of us.”

A spokesman for the firm could not be reached for comment, but Lazard Freres has consistently denied any wrongdoing.

Deputy County Counsel Steve Carnevale had no comment on the settlement other than to say: “The Lazard case is on the agenda for closed session at Monday’s meeting.”

But sources familiar with the case filed in June 1996 said the settlement involves $9 million in damages plus attorneys’ fees. In addition, the sources said, Lazard Freres will indemnify the MTA for any potential exposure to the Internal Revenue Service on the refinancing deal.

Purchases of the securities were made without competitive bidding. MTA officials did not check to see if the prices being charged by Lazard Freres for the securities were in line with market levels until a new financial advisor was hired and asked to review the transactions two years after they had occurred.