| Wastewater | Deer Island, Boston Harbor - Page 20 |
| Oxford University’s Bent Flyvbjerg’s “Iron Law” showed that most megaprojects are "Over budget, over time, over and over again." According to another professor, Giorgio Locatelli of Leeds University, the very characteristics of megaprojects, their large size, uniqueness, heavy involvement of the government, and technical and organizational complexity all make them susceptible to corruption - Corruption in Public projects and Megaprojects: There is an elephant in the room!. One of the people protecting the interests of citizens of the Commonwealth of Massachusetts from corruption during the construction of the Deer Island Treatment Plant and the Big Dig was the former boxer A. Joseph DeNucci, the Massachusetts State Auditor. |
| Born in the working-class Nonantum section of Newton, Mass., without a college education, DeNucci would serve for ten years as a Massachusetts House Representative before winning the position as State Auditor in 1986. A position he would hold for 24 years before retiring. In the thousands of audits his office produced DeNucci was relentless in what he perceived as wasteful spending. The Big Dig and the Boston Harbor Project both would be targets of many DeNucci’s reports. Clearly there were massive cost overruns on the Big Dig though insiders knew early on that cost projections were wildly overly optimistic. With substantial federal funding and constantly evolving budgets and timetables attempting, to pin down wasteful spending was difficult. Near the end of the Big Dig project DeNucci would claim that his team had identified almost $600 million dollars in wasteful spending. When errors involving millions of dollars were found, they paled beside the nearly $15 billion total cost. It would be Massachusetts Attorney General Martha Coakley who would reach a $450 million settlement with Bechtel/Parsons Brinckerhoff, the design and construction management companies, after shoddy construction resulted in a ceiling collapse that killed a driver in the Ted Williams tunnel. The companies were never charged with corruption. Only six employees of a concrete supplier were charged with fraudulently concealing the quality of some concrete. |
| While costing substantially less than the Big Dig, the Boston Harbor Project still cost in the billions and it unlike the Big Did was primarily paid for by the citizens of Massachusetts. DeNucci’s job as he always saw it was making sure the public’s money was spent wisely. The MWRA did not get off to a good start with the dust up over the expensive tastes in office furniture of its first director Michael Gritzuk. Something DeNucci found completely unacceptable for an agency paid for by the public. It would be Levy who would be questioned next over the selection of Kaiser Engineers as the Construction Manager. DeNucci himself would receive pushback on that matter when it looked like he was doing it at the bidding of Boston engineering firm Stone & Webster. |
| Never one to miss a chance at hyperbole, DeNucci in 1993 accused the MWRA of being a “ratepayers’ nightmare” for paying for crushed rock needed to protect the new plant from ocean storms. The MWRA’s plan had been to use the crushed rock that was generated from digging the outfall tunnel. When that portion of the project was delayed the MWRA made the decision to not delay the overall project and instead purchase crushed rock for the seawall. That set off alarm bells for DeNucci. For construction manager head Richard Fox, because of inflation any delays in the building schedule would have a dramatic impact on the overall cost, buying gravel was a small price to pay to keep the project on schedule and would save money ultimately. |
| DeNucci’s misunderstanding that maintaining the construction schedule would ultimately save money was a common thread that ran through many of his accusations of misspending by the MWRA. The other was his not taking into account requirements put on the project by the EPA. The best example was DeNucci’s charge in 1994 that the MWRA had wasted millions of dollars building a pier at the old Revere Sugar company in Charlestown. Douglas MacDonald, then in charge of the MWRA, agreed saying DeNucci’s was “right on target” and that the pier was not going to be used but that building it had been required by the EPA. |
| There were many others in Massachusetts state government who took shots at the MWRA. Robert Cerasoli was a state representative from Quincy unhappy with the MWRA building a sludge-to-fertilizer plant in his city when in 1991 he became the Massachusetts Inspector General. Earlier he had accused the MWRA of extravagant spending when a general counsel the agency had hired quit after just 18 months. The MWRA had hired Sanford Harvey from the EPA as part of an effort to have more minorities on the staff. |
| Cerasoli in his new position as IG misfired again in 1993 when he inaccurately accused the MWRA of not exploring other locations in its selection of Walpole for a sludge dump site. Then again in 1994 when he described a new MWRA support building on Deer Island as having “gigantic chandeliers” and “custom masonry bases” when it in fact had dish lights on long chains and concrete block walls. MWRA director MacDonald accused Cerasoli of inflammatory language that seemed “calculated by its polemical language to inflame rather than inform public opinion.” |
| But it was Cerasoli back in early 1993 who first recommended to the MWRA that they delay a vote to transfer their financial services work to a different firm. This would develop into a massive scandal that would garner national attention, shake the normally placid municipal bond market, cost leading financial firms millions of dollars in fines, and send the chief architect of the deals to jail for 33 months. Remarkably, the MWRA was not blamed for financial misconduct and would not lose its financial independence. |
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It is unfortunate that while the successful planning, design, and construction of the Boston Harbor Project is often praised, the complex and innovative financial plan that paid for it is not. Instead, the story about financing most often told is of one man’s failings. In the 1980s Mark Ferber was the darling of Massachusetts’s political elite. Born in a blue-collar Inwood section of Manhattan after graduating from Oberlin College in Ohio he came to the Boston area where he earned a law degree from Northeastern University and a master’s in public administration from the Kennedy School of Government at Harvard. In 1977 he was hired as an intern at the Massachusetts State House, by 1979 he was the budget director and chief counsel for the powerful Ways and Means Committee chairman Chester Atkins. The rise did not go unnoticed. As a 28-year-old in 1981 he earned the praise of the Boston Globe for being the primary craftsman of the state’s $6.3 billion budget. A move to the private sector followed where he parlayed his political connections – including those to senate president William Bulger, state treasurer Robert Crane, governor Michael Dukakis, and Boston mayor Ray Flynn – providing advice as an underwriter selling municipal bonds first at Kidder, Peabody & Co. in 1981, then in 1986 at First Boston Corp., and in 1988 at Lazard Freres & Co. His praise in the Boston Globe continued in 1988 with a story titled, “From Beacon Hill Wunderkind to Wall St. magician.” |
| With exceptional connections in Massachusetts politics, Ferber’s clients would include state agencies such as Industrial Finance, Government Landbank, Convention Authority, Economic Development and Industrial Corp., and the Office of Transportation and Construction. The City of Boston used his services as did Brandies University, Emerson College, Mass. General Hospital, and Milton Academy. Nationally his clients included the District of Columbia, the State of Michigan, the U.S. Postal Service, and to an Arkansas advisor to Bill Clinton. He had become a major national player in the selling on municipal bonds. As an MWRA financial advisor he was paid handsomely, $800,000 a year. Lucrative work he performed for multiple municipal agencies across the state and country. |
| Ferber’s relationship with the MWRA had begun with the creation of the agency in 1985 just as it was about to begin issuing what would become the billions of dollars of bonds it needed to finance the cleanup of Boston Harbor. As an advisor he would help the MWRA by recommending which firms should sell the bonds effectively making him the gatekeeper for the financing of the biggest public works projects in the country. The MWRA’s selling of the bonds would be a major success story. Agencies that rate the financial risk gave the MWRA’s bond some of their highest ratings, this at a time when Boston’s and Massachusetts’ bond ratings were near junk bond levels. The MWRA’s high ratings would lower the final cost of the project by millions of dollars. |
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This is where the financial stories of the early MWRA diverge. Mark Ferber would initially be the face of the success story. He was one of the best in the country at selling the worth of municipal bonds. But it was the value of the bonds themselves while seldom discussed that would be the real key to their success. To thank for that were the other major players at the start of the MWRA. Douglas MacDonald before he became executive director had a key role in writing the law that created the MWRA giving the agency independence from the whims of the state legislators. Robert Levy in his time as executive director had both insisted on integrity for the agency and assembled a world-class design and construction management team that if not interrupted had the best chance of meeting deadlines for the project. Ensuring that nothing would get in the way of meeting those deadlines was federal Judge Mazzone. |
| Seldom mentioned and not getting not nearly enough credit for the success in the early issuing of MWRA bonds is the role Philip Shapiro played. At the beginning of the MWRA, as interim director, he initiated several keys steps to keep the project on schedule including the selection of Deer Island as the sole site for the new plant and the rejection of pursing a 301(h) waiver. Later as financial director he was responsible for developing a solution to a problem that could have made the MWRA’s bonds far less desirable. |
| Maintaining the schedule for the construction of the Boston Harbor Project ensured that the impact of inflation on the total cost of the project could be accounted for, but the MWRA would still be obligated to repay the bonds it offered over 25 or more years. What wasn’t guaranteed was that all 60 communities receiving services from the MWRA would continue to pay their share. In the late 1980s Boston, the state, and communities were all being hit by an economic slowdown. The risk that needed to be mitigated was a situation where one or more of communities served by the MWRA defaulted on payments. What Shapiro and the MWRA came up with was the Community Obligation and Revenue Enhancement (CORE) fund. Effectively a self-insurance plan, each community that received services from the MWRA had to pay an extra ten percent in cash to a fund that would be used to cover the shortfall if a community defaulted. The fund was never used but it was an effective tool in convincing buyers of bonds that the MWRA would meet their obligations. |
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In his 1996 annual report IG Cerasoli proudly reprinted a letter his office had received from Assistant U.S. Attorney James Farmer praising the “skilled and tireless work of you and members of your staff” and that “in significant part due to your efforts, [the public finance industry] is cleaner, fairer, and far better understood.” It had been Cerasoli who in early 1993 had questioned the MWRA on why they wanted to transfer their financial adviser contract to a different company. One that then executive director Paul Levy a year earlier had called not qualified. The reason was because that was where their financial adviser Mark Ferber had moved, and it wasn’t the first time they had transferred their business to follow him. They had done it at every jump Ferber had made to a new company. The practice was not out of the ordinary. Most of Ferber’s other client did the same thing. It was Ferber and his connections in government and the financial industry that the MWRA and other institutions wanted. Following a specific financial adviser to a new company was standard practice. What made Ferber standout was that in Massachusetts he had the most clients and was doing the most business. |
| At the same time another practice in the municipal bond market was that the financial adviser in most cases selected and negotiated with the firms that would sell an agency’s bonds. It need not be a competitive decision. Unlike in the market for commercial bonds there were few rules in the municipal bond market. The barn doors were wide open for influence peddling and corruption. State campaign finance laws then and now provided a modicum of protection from financial firms attempting to curry favors with elected officials. But in 1993 there was little in the way of rules on the relationship between the financial adviser and the firms they selected to sell bonds to investors. Unfortunately for Mark Ferber the barn door was closing. |
| Initially the problem IG Cerasoli had with Ferber was that as an employee of Lazard Freres he had selected First Boston for a bond offering, then went to work for First Boston. A problem, but not the big problem. That would break in June of 1993 with a story by the Boston Globe’s Stephen Kurkjian. Mark Ferber, while he was working for Lazard Freres, as a paid adviser to the MWRA, had selected Merrill Lynch & Co. to underwrite an MWRA bond offering. Picking the firms that would sell the MWRA’s bonds was perfectly normal. What was not normal was that Ferber had received a payment from Merrill Lynch and did not disclose it to the MWRA. |
| In October of 1995, just over two years later a federal grand jury indicted Ferber on 63 counts of fraud, attempted extortion, and accepting illegal gratuities. An investigation over the previous two years had shown that Merrill Lynch to expand its municipal bond business had been pushing a complicated financial product called an interest-rate swap it sold to commercial clients. Acceptance had been limited and both the size of the MWRA’s offering, and the sophistication of its financial adviser Mark Ferber made it look like a good candidate. To encourage Lazard Freres, Ferber’s employer at the time, who had not been in the interest-rate swap business, Merrill Lynch decided to help sell the product it would split the fees that it would earn. Lazard Freres would then split what it earned with Ferber. The government’s case was that Ferber never told the MWRA that he was receiving money from the company he was recommending. |
| One would have to read elsewhere to understand how interest-rate swaps work, however Ferber’s defense was based on his understanding. He would argue that first neither the MWRA nor any ratepayers lost money, and second, it was not illegal under the law. Though he did admit, “I’m not telling you it’s pretty, but there is absolutely no violation of my fiduciary responsibilities” to the MWRA. |
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Unfortunately for Ferber the federal prosecutors convinced the jury that he had bullied and shaken down investment bankers wanting to do business with the MWRA. He would be convicted, sentenced to 33 months in jail. and a be fined $1 million. Presiding U.S. District Judge William Young clearly had an opinion calling Ferber a “faithless agent” and, “There must be no question of the disclosure. And if this sorry lot of municipal bond attorneys do not understand it, let me spell it out. It is required that every potentially conflicting engagement of a fiduciary agent ne disclosed to the principal in writing in detail before that conflict is undertaken.” He continued, “There’s no confusion here. This is a kickback. This is a secret side deal where Merrill Lynch was greasing you. Don’t for a minute think yourself that you are some sort of scapegoat. When it all came down, you are a man without honor, lying through your teeth to save your skin.” |
| What could be argued were inflammatory words by the judge were answered by Alan Dershowitz in a New York Times opinion piece, Making up the law (Aug. 16, 1996), “It is up to Congress, not the courts, to decide which borderline conduct is to be criminally prosecuted and punished. The conduct at issue in the Ferber case should be made a crime, and any banker who continues to engage in such conduct after it is criminalized should be prosecuted. But criminal prosecution should not be used as the vehicle for creating crimes. Mr. Ferber did not have the fair warning that his questionable conduct was also criminal conduct. Congress should now enact a law making it a crime to fail to disclose fee-sharing arrangements.” |
| Should Ferber had known better? The day after Ferber was convicted the Boston Globe published a story by Stephen Kurkjian, the writer who had broken the story. He speculates that Ferber “hurt his own credibility by refusing to acknowledge that he had made any mistakes or misstatements in the business dealing that formed the basis of the criminal charges against him.” He quotes an unnamed source saying that Ferber would now attract the same attention as convicted Wall Street barons Michael Milken and Ivan Boesky. Not good company to keep. |
| While at that moment, to the letter of law Ferber, might have been correct, at least in how he read it. The laws governing the municipal bond market were changing, and one would have thought that he would have or should have known it. The Municipal Securities Rulemaking Board was established by Congress in 1975 to make rules for “broker-dealers,” investment banking firms that underwrite and trade municipal securities. Their mission was and is to protect investors and the public interest by ensuring that information about the municipal marketplace is readily available. Did he think he could get in under the wire? |
| An interesting take on the case was presented by Christine Chung and David Byer in a 1998 paper titled, The Electronic Paper Trail: Evidentiary Obstacles to Discovery and Admission of Electronic Evidence (PDF). Email communications between a Merrill Lynch employee and his supervisor about the arrangement with Ferber were initially not allowed as evidence. But under a complicated hearsay ruling it eventually was. The authors speculated that, “The e-mail message may have devastated Ferber's defense.” Released from jail in March of 1999, Ferber was disbarred and prohibited from work in the securities field. |
| In the mid-1990s the municipal bond debt in the U.S. was over $1 trillion and growing at almost $300 million a year. There were a lot of deals being made without much oversight and nobody knew how many of the deals had arrangement like Ferber’s. Locally the affair could have blown up to become a major scandal for the MWRA. Any hint that employees were profiting from financial arrangements would have been devasting, potentially resulting in a loss of independence for the agency. During the trial both executive director MacDonald and financial director Shapiro were pressured by the defense on if they knew of Ferber’s fee-splitting arrangement. Both said they were unaware of its full extent, and their testimony was bolstered when Ferber disclosed that he was told by Merrill Lynch lawyers not to tell MWRA officials. Even local politicians did not take the bait and attack the MWRA for the affair. Possibly because many political leaders in Massachusetts had relations with Ferber. Also, for the MWRA in the mid-1980s, the big issue was the rapidly rising rates for water and sewer. |
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