The investment bank that advised the government not to increase the price of Royal Mail shares, despite widespread fears they were hugely undervalued, made a profit of more than £8m by immediately selling the company's stock in the wake of its controversial privatisation, a parliamentary commitee was told.
Lazard, which was paid £1.5m by the government for flotation advice, followed its own recommendation and bought 6m shares at 330p each on the day of the float but sold them within 48 hours at 470p to reap a profit of £8.4m.
Margaret Hodge, chair of the parliamentary public accounts committee (PAC), said Lazard "made a killing at the expense of the ordinary taxpayer that lost £750m on day one" of Royal Mail's London Stock Exchange debut.
An official report by the National Audit Office last month found that the government decided against increasing the flotation price of Royal Mail beyond 330p-a-share because of warnings from Lazard's corporate advisory arm, Lazard & Co, that City funds would be put off.
On the day of the flotation, on 11 October, the shares rocketed 38% due to phenomenal demand from the City and public. They gained £750m in value in the biggest one-day rise in a privatisation since British Airways in 1987. The shares, which continued to rise to a peak of 615p, are now trading at 530p.
During the sale Lazard & Co advised the government to sell the shares as cheaply as 212p. Other banks valued the shares as high as 510p, with none reckoning they were worth less than 300p.
Hodge, who questioned Lazard and the government's other advisers on Wednesday, said: "How did you get it so wrong that it cost the taxpayer £750m on day one?"
Lazard's investment division, Lazard Asset Management, cashed in despite the advice from the business secretary, Vince Cable, that the postal service should "start its new life with a core of high-quality investors who would be there in good times and bad".
William Rucker, chief executive of Lazard & Co, admitted at the PAC hearing on Wednesday that his part of the company knew that Lazard Asset Management was given "golden ticket" priority investor status, allowing its investment arm preferential access to the shares.
Hodge said she was astounded that Rucker knew that Lazard Asset Managment was on the list. He denied that there was anything improper in Lazard acting as adviser and investor. He said there were Chinese walls preventing one half of the business from knowing what the other half was doing.
Denying any wrongdoing, Rucker pointed out that the £8.4m profit was made on behalf of clients rather than for Lazard Asset Management itself.
Lazard Asset Management was one of 16 investors given "priority investor" status that allowed them to buy bigger chunks of Royal Mail in the hope that they would stay with the company through thick and thin.
However, six of the investors sold all of their shares almost immediately and a further six had sold most of their stake within weeks.
The list, which was published by Cable on Wednesday following a long campaign by politicians and the media, revealed that three aggressive hedge funds were given the "golden ticket" status despite the business secretary's pledge that Royal Mail would not fall into the hands of "spivs and speculators".
The hedge funds – Third Point, Och Ziff and George Soros' family fund – were allowed to buy millions of shares while hundreds of thousands of ordinary people were limited to just £749 worth.
Hodge said the public offer was massively oversubscribed and the public generally "could have bought the lot". She said the funds made a killing at the expense of ordinary taxpayers, who lost £750m on day one. "That is just really, really uncomfortable – that is just wrong."
Hodge said it felt grossly wrong that a few in the City "made a huge buck" while the ordinary taxpayer lost out.
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