Board gives tentative OK to investing city pension funds in private company

April 01, 1993|By Eric Siegel | Eric Siegel,Staff Writer

Despite receiving conflicting legal opinions, Baltimore's Board of Estimates gave conditional approval yesterday to a precedent-setting proposal to invest up to $10 million in city workers' pension funds in a private company.

The Board of Estimates' approval was contingent upon the adoption by the pension board of guidelines to govern the direct investment of pension money in companies whose stock is not publicly traded -- something the board has never done.

Yesterday's tentative go-ahead came after the Board of Estimates twice deferred the proposal for the city's employees' pension funds to invest up to $10 million in the Chapman Co., a city-based minority-controlled investment banking company.

The deal calls for the Chapman Co. to use the pension money to expand its business of providing financing for publicly traded minority controlled companies, according to documents.

The pension funds would get a fixed yearly return of about 10 percent and could realize another annualized 15 percent by selling its stock if the company meets its goal by going public within five years, said president Nathan A. Chapman Jr.

Mayor Kurt L. Schmoke -- who ordered an independent legal review of the proposal last week -- said that pension board guidelines were needed on the type of "alternative investments" in which the city's retirement systems could participate and the amount of money that could be used for them.

Noting that he did not want the proposal to be approved before the guidelines were set, the mayor said, "My problem is the timing problem, not the deal. It's a good deal."

But Shapiro and Olander -- the law firm with which the city contracted to review the proposal at a cost not to exceed $7,000 -- reached a different conclusion. The firm said in a written opinion that even after pension board guidelines are put in place, "it would never be prudent for the [pension] trustees to make a substantial direct investment in a securities broker-dealer." The firm's name partners include Ronald M. Shapiro, campaign treasurer and key fund-raiser for the mayor.

The Shapiro and Olander opinion said that if the pension trustees insist on sufficient safeguards to protect their investment, then they could be liable for any possible securities laws violations. Also, it said, there will "inevitably" be conflicts of interests between the management of city funds and the protection of the firm's investment.

But another law firm, Morgan, Lewis & Bockius of Philadelphia, which has been advising the pension board on the Chapman proposal, said the Shapiro and Olander opinion shows "an incomplete analysis and comes to a wrong conclusion." Morgan, Lewis, in a written response, criticized Shapiro and Olander for reaching conclusions based on a "financial, rather than a legal, perspective" and said pointedly the pension board should rely on financial advisers for financial advice.

At least one pension board member, William E. Dix, said that the Shapiro and Olander analysis might make him reconsider his approval of the Chapman proposal, but he said he had not seen the opinion.

But City Comptroller Jacqueline F. McLean, who sits on both the pension board and the Board of Estimates, "discounted" the Shapiro and Olander opinion as "too subjective." The potential returns from the Chapman deal are three times what the pension trustees are currently receiving from other investments, she said, and the potential risk is limited.

The city's retirement systems have assets of $2 billion invested through about 30 investment managers in stocks, fixed income instruments and other assets, according to Ernest P. Glinka, the city's pension administrator.

Among them are such well-known managers as Mercantile Safe Deposit and Trust Co., Boston-based Putnam Advisory Co. and New York-based W. R. Lazard & Co.

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