Bid to invest city pension funds in black-owned firm collapses

August 25, 1994|By JoAnna Daemmrich and Kim Clark | JoAnna Daemmrich and Kim Clark,Sun Staff Writers

An unprecedented proposal to invest $10 million in Baltimore pension funds in a small black-owned brokerage company has collapsed in the wake of a warning by the Securities and Exchange Commission about potentially great financial and legal risks.

After federal regulators concluded the investment would lead the city effectively to control Chapman Co., the Baltimore-based stock brokerage withdrew its request. It had promised double-digit annual returns despite a spotty record.

As a result of the SEC warning, City Solicitor Neal M. Janey recommended rejecting the controversial proposal because it would "involve such a high degree of potential risk that the investment would not be prudent as a matter of law."

Two days later, Nathan A. Chapman Jr., founder and president of the firm that specializes in serving minority businesses and investors, notified the city retirement system that he was abandoning his request.

Mr. Chapman, who has said that he wants his firm to become "the black Merrill Lynch," wrote Aug. 5 that his strategic direction had changed.

"I think it was a great opportunity for the city and for us, but it is from a strategic point of view better that we withdraw our proposal," he said yesterday.

Worried by the first-of-its-kind investment, the city had turned to the SEC for a legal opinion. The commission found that the city retirement system would effectively control Chapman Co. by appointing two members to the board of directors and making an investment "approximately 20 times the combined investments of the other shareholders."

In a July 26 letter, an attorney for the SEC concluded that the city would be required to register with the National Association of Securities Dealers as a "controlling person," leaving it at risk of lawsuits and subject to any administrative sanctions if anything went wrong with Chapman Co.

Some city officials expressed relief at the quiet conclusion to what had been at times a stormy saga of money and politics involving former Comptroller Jacqueline F. McLean and a little-known panel that oversees management of $2 billion in retirement funds.

"Now we can get on to something new," said pension trustee William Dix.

Mayor Kurt L. Schmoke initially had favored the deal, but insisted that explicit guidelines be developed to regulate such high-risk investments by the pension system. He also suggested holding off until the city obtained a ruling from the SEC.

Mr. Schmoke said yesterday that the city should not be precluded from investing directly in companies instead of simply giving them city workers' pension money to manage.

"We will get proposals like this in the future, but now we have the investment guidelines in place," he said.

Pension boards, bound by law to handle retirees' funds prudently, usually parcel out money to professional investment managers who buy bonds, real estate or stock in big, publicly traded companies.

But Mr. Chapman persuaded the trustees that his proposal was a good example of a socially responsible investment, returning profits while advancing a minority company.

Mr. Chapman planned to expand his business with the pension funds and also underwrite other black-owned firms.

Helping Mr. Chapman's cause was the new chairman of the pension board -- Mrs. McLean. Now retired after being indicted on theft and misconduct charges, she ran for comptroller in 1991 on a platform of encouraging minority business. And she had strong support from black business leaders, including Mr. Chapman, who contributed several thousand dollars to her campaign.

Mrs. McLean faces trial next month on charges that she arranged for a $1 million city lease of the headquarters of her travel business and hired a fictitious consultant. But the allegations did not surface until long after she had successfully lobbied for relaxing pension board rules to allow the Chapman deal.

In the spring of 1993, the Board of Estimates tentatively signaled its approval, except for the mayor's condition that the guidelines drafted and the proposal be reviewed by the city's legal department. Mr. Chapman bought champagne, hired brokers and moved into elegant new offices at the top of the city's World Trade Center.

But as the city's lawyers painstakingly vetted the proposal, Mr. Chapman's fortunes turned sour. A combination of the spending spree and some unlucky bets on interest rates pushed the company deeply into the red by the end of last year.

Worse, because of the cash crisis, the company ended the year in violation of SEC rules that require brokerage companies to maintain a cushion of cash to protect investors.

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