As an assistant state treasurer last year, Patrick F. Landers III negotiated terms of a $1.25 billion bond offering with
The complex, fast-tracked bond deal was a good one for Lehman Brothers, which earned two-thirds more in fees from the state, about $4.7 million in all, than it would have earned through a typical bond offering.
Lehman Brothers was awarded the work without having to compete, after Landers sought a waiver of bidding rules on the grounds that speedy action was required and that the deal was too complicated to solicit bids.
Landers declined to comment. State Treasurer Timothy P. Cahill, who was Landers's boss and approved the selection of Lehman Brothers for the work, said there was no link between Landers's role in the offering and his hiring by Lehman Brothers.
"I have full confidence in Pat's ability as a financial professional and know that all his actions were in the best interest of Massachusetts taxpayers," Cahill said.
Still, specialists in business ethics said Landers's departure so soon after he negotiated a no-bid deal raises concerns.
"You have to be extremely cautious about the appearance, if not the reality, of a conflict of interest," said W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College. "He may not have been looking for a job with the firm he was negotiating with . . . but it raises the red flag of a potential conflict of interest."
The bonds, backing a blend of old and new debt supporting state projects, were issued as both conventional bonds and a type of debt instrument called an interest rate swap. Under the interest rate swap, the state pays a low fixed rate to Lehman Brothers, which in turn sells the bonds to investors at a variable rate.
The deal will save the state $37 million in reduced interest payments, treasury officials say.
Landers recommended that Lehman Brothers be picked for the job of packaging the deal and selling the bonds to investors from a list of prequalified investment houses, said Treasury spokeswoman Alison Mitchell. The selection was made by another official, former first deputy treasurer Neil Morrison, she said, and Cahill gave final approval.
For the work to be awarded without bidding, Landers was required to obtain a waiver from a state panel called the Finance Advisory Board. The board gave approval to the waiver request on March 5. Landers was one of the five members of the board and was in attendance when the board voted unanimously for approval; there is no indication in the record of the vote that he abstained.
The bonds were issued in May. Four months later, in September, Landers notified Cahill and the State Ethics Commission that he had just been contacted by Lehman Brothers about a job, a disclosure that is required by law. He was hired by Lehman Brothers in December.
Landers, a former Democratic state representative from Palmer who served in the Legislature from 1987 to 1999, now works in the same Boston office of Lehman Brothers as an old House colleague, Paul Haley, who was Lehman's representative on the bond deal. Landers is working on healthcare debt, primarily with hospitals and other nonprofits, an area he had not previously worked in.
In his job in the Treasury, he earned $128,637 a year; senior vice presidents at financial firms earn $150,000 to $300,000 base salary and up to $1 million or more with bonuses and stock options, said one New York-based financial recruiter.
Landers and Haley directed questions to Lehman Brothers' spokeswoman, Kerrie Cohen. Cohen would not address the circumstances of Landers's hiring, but said he was well qualified for the job.
"Pat Landers brings over 20 years of financial knowledge and technical expertise to our public finance healthcare practice," she said. The firm, she said, is "very proud of the services we rendered to the Commonwealth of Massachusetts." Lehman brothers occasionally wins state bond business; the last time before this deal was in 2006.
But the lack of bidding is generating criticism. Senator Mark C. Montigny - chairman of the Joint Committee on Bonding, Capital Expenditures and State Assets - had no comment on Landers's job change. But he said that when public agencies borrow, they should always put the work out to bid.
"The best way to deal with any public financing is to let all the firms compete and let the best firm win based purely on numbers," Montigny said. "Whenever there are negotiated deals, there is room for debate, and in public financing there shouldn't be room for debate. I've heard every excuse, a great interest rate environment, we don't have the time. Whatever the excuse, it's never good enough to justify going around public bidding."
The state conflict-of-interest law does not bar public officials from taking a job with private companies they dealt with, but it does prohibit former public officials from ever working on any specific piece of business they worked on while in government.
In addition, former state officials are barred for one year from lobbying their former agencies on any issue, which means Landers cannot do any business with the treasury for a year.
The deal came together last year after Cahill, whose office manages $18 billion in state debt, decided to issue $1.2 billion in bonds to fund new capital projects and refinance existing debt at a lower interest rate. Treasury officials selected Lehman Brothers because it was one of the first investment banks to propose this type of complex bond offering, said Mitchell.
As head of the debt department, Landers was responsible for working out the terms of every bond deal.
In his request for the bid waiver, Landers explained that Cahill's office needed to dispense with bidding because it might have to jump into the bond market on short notice to take advantage of favorable interest rates.
Such a rapid response, he said in the bid waiver application, would be impossible "in a competitive, sealed-bid transaction requiring prior publication of notice of sale."
In addition, he wrote, the bond issue was going to be too complex to be competitively bid, because it required the "coordinated occurrence of many events."
Cohen said similar deals around the country are typically negotiated, not bid.
A New York-based specialist on municipal debt, Andrew Kalotay, said interest rate swap deals are sometimes bid, but it's not unusual for them to be negotiated.
In this case, there were two parts to the deal; $400 million was issued as general obligation bonds, and the rest, $845 million, was structured under the interest rate swap.
Lehman Brothers received $900,000 from the sale of the general obligation bonds, and another $3.8 million in fees for the swap, totaling $4.7 million.
If the entire $1.2 billion bond offering had been general obligation bonds, Lehman Brothers would have earned at most half as much, $2.8 million.
Under industry guidelines followed by Cahill's office, multiple investment firms take part in every general obligation bond offering, and no single firm earns more than half the fees.
Landers negotiated a fee that was lower than Lehman Brothers' customary rate, Mitchell said.
Lehman Brothers was paid $4.50 per $1,000 bond, down from the firm's usual rate of $5.00 per bond.
That saved the state about $500,000 in fees, she said.
