Michael Lissack Lynch & Co., the nation’s biggest broker at the time, wanted, and got, him. And how. Merrill paid a retainer to Lazard for Ferber to steer business to Merrill in a highly unusual fee-splitting contract that netted both firms millions of dollars. The arrangement was approved by top executives at both firms -and contained provisions keeping its existence a secret. The contract was a meshing of Lazard’s brains and Merrill’s brawn: Lazard was the nation’s pre-eminent financial adviser to municipalities and Merrill was the biggest seller of municipal bonds. A financial advisor is paid for his sound independent judgment to help local officials deal with the vagaries of Wall Street. By contrast, a municipal banker is on the opposite side of the table from the locality. The financial advisor is supposed to do what he can in the long-term interest of his client the locality. The banker is supposed to do everything he can in the interests of his firm. These are two distinct functions that government agencies want to keep separate. But the contract blurred them. It secretly gave Ferber, who was paid for his independent judgment, a powerful financial incentive to compromise his in- dependence and refer business to Merrill. And the cities and state agencies, including the one cleaning up Boston Harbor, that did business with Ferber were never to know of this when they picked Merrill to sell bonds and handle other complicated financial matters. This contract, in force from 1989 to early 1993, brought in more than $6 million in fees that the two firms split, and some $2.6 million in retainer pay- ments from Merrill to Lazard. And millions more flowed directly to Merrill from Ferber’s clients. The arrangement, which became public last sum- mer, is now the subject of an investigation by the Securities and Exchange Commission, to see if it violated anti-fraud provisions of the nation’s secu- rities laws by failing to disclose important information to clients. In Boston, the Massachusetts Inspector General, the state’s top investigator, issued a blistering report calling the contract a “quid pro quo” that may cost taxpay- ers millions of dollars. The arrangement is simply “outrageous,” said an SEC commissioner in the Boston press...The entering of an undisclosed contract by an independent investment adviser violates everything an investment adviser is supposed to be. I hire an investment adviser to give me prudent
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