Gambling with pension money

March 08, 1994

The fallout from City Comptroller Jacqueline F. McLean's indictment continues. Because of charges of felony theft and misconduct in office, all her actions as the No. 3 municipal officer are under microscopic scrutiny. Possible hidden motives are belatedly seen in proposals she advocated, even though none may have existed.

In one example, city pension trustees are now taking a second look at their plan to invest $10 million in the black-owned, Baltimore-based Chapman Co. brokerage firm. Trustees who just a year ago thought the scheme was a splendid example of socially responsible investment now are getting cold feet.

They don't like the Chapman Co.'s role as a major contributor to the McLean campaign; they don't like -- in retrospect -- the passion with which the comptroller championed the plan. And they are realizing their investment would make them a major stockholder in the investment firm, a factor that could make the retirement system liable in the event that something goes wrong with the Chapman firm.

These are the kinds of considerations the trustees should have taken into account in making their original decision. At that time, some of them acknowledge, they may not have forcefully demanded full disclosure of all relevant information about the deal, which still has not been completed because of legal complications.

Social investment has been trendy in recent years. A number of firms tailor funds for investors who do not want to make profits from the military-industrial complex, tobacco companies or known polluters. The Chapman deal was in this league. By helping a fledgling minority-controlled investment firm, the pension system was in a position to make profits while advancing black capitalism.

There is nothing inherently wrong with this kind of public venture capitalism -- as long as the pitfalls are recognized. The chief pitfall is that the pension fund could lose its money. For a speculative investment company, this may be an acceptable risk.

A retirement system, however, must operate on a vastly different principle. Its main duty is to conserve capital and not risk the pensioners' benefit money. It has to be doubly careful.

A year ago, the biggest problem with the Chapman deal was that it was struck in the absence of strict and explicit guidelines regulating high-risk investments by the pension funds. The current predicament underlines why such guidelines are important.

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