Ethics violation tests First Marblehead

It was a good -- if eventful -- year for First Marblehead Corp., the Boston provider of private education loan services. But investors, at least until recently, paid more attention to the eventful than the good.

First Marblehead helps banks create and market private loans to students at more than 5,300 colleges, universities, and private schools and also packages loans into securities instruments for cash-flow-seeking investors to buy.

During 2005, First Marblehead's revenue soared 73.9 percent, as the company's return on average equity, a measure of how well it makes money for shareholders, hit 49 percent.

But in September, chief executive Daniel M. Meyers resigned after it was disclosed that he had used his own money to give personal gifts worth $32,000, including a fancy watch, to a student-loan executive at Bank of America Corp., one of First Marblehead's biggest customers. At both companies, the gifts violated ethics policies that place limits on such exchanges to avoid appearances that business could be swayed.

Investors' fears that Bank of America would end or curtail its relationship with First Marblehead contributed to a roughly 42 percent drop in First Marblehead's share price in 2005. Shares have since rebounded more than 30 percent, and last month First Marblehead said it signed a new contract with Bank of America.

But stock analyst Matt J. Snowling of Friedman Billings Ramsey Group, an Arlington, Va., investment bank, wrote in a recent report that he ''remained cautious" about First Marblehead, questioning whether it had offered concessions to land the Bank of America contract. First Marblehead wouldn't comment on terms of the new pact, but Meyers's replacement as chief executive, Jack L. Kopnisky, said the firm is poised to continue its growth. Kopnisky said First Marblehead, founded in 1991, remains a textbook story of how entrepreneurs can spot an overlooked business niche, in this case privately originated student loans.

With college tuitions soaring and banks eager to do business with students looking for loans, the overall private student loan market soared from $1.3 billion to $13.8 billion in the last decade, Kopnisky said. He estimates First Marblehead serves 19 percent of that market.

Kopnisky said he expects the market to keep growing rapidly. One risk some analysts worry about is whether some of First Marblehead's bank customers might look to shift services they now buy from First Marblehead to in-house operations so they can pocket more profits for themselves. But Kopnisky said most banks are already juggling multiple lines of business and know they can't match First Marblehead's specialized expertise and troves of data on how to best measure the risk of lending to an individual student.

Chris Reidy can be reached at reidy@globe.com.