SEC told top pension official Chapman's deals were illegal

Manager used state funds to invest in his own firms

September 26, 2002|By Michael Dresser and William Patalon III | Michael Dresser and William Patalon III,SUN STAFF

The Securities and Exchange Commission told a top Maryland pension official that Nathan A. Chapman Jr. violated federal law when he permitted money managers he supervised to invest state pension funds in his own companies, newly released documents show.

Carol Boykin, the pension system's chief investment officer, wrote in a March 19 memo that the SEC regards the purchases of Chapman stock as breaking a securities law, the Investment Advisers Act.

"I was told by the SEC that these transactions were a violation of fiduciary duty according to section 206 (an anti-fraud provision) of the 1940 Act," Boykin wrote to pension system executive director Peter Vaughn.

In her memo, Boykin also disclosed that Chapman had told her as far back as August 2001 that a money manager he selected had invested in a Chapman-controlled company.

She didn't act on that information, she said, because she thought Chapman meant the manager had invested personal funds, not state pension money - a misinterpretation Chapman yesterday called "incredible."

"What else could I have been talking about?" Chapman said. Boykin declined to comment for this article.

The disclosures came in documents obtained by The Sun under Maryland's public records act. Chapman, chairman of the state university system's Board of Regents and a friend of Gov. Parris N. Glendening, is also under investigation by the U.S. attorney in Baltimore.

The SEC would not comment on Boykin's memo. "It is the commission's policy to neither confirm nor deny the existence or nonexistence of an investigation or inquiry," said Carol Patterson, a commission spokeswoman. "It's also our policy to never comment on a specific company or individual."

Chapman declined to comment on the SEC investigation, saying he "would prefer not to discuss any regulatory matters."

Section 206 of the Investment Advisers Act is policed by the SEC and, in part, prohibits transactions by registered investment advisers, such as Chapman, that conflict with the best interests of their clients, such as the state pension system.

Bruce L. Lieb, a partner in the corporate law practice of the New York-based firm Proskauer Rose, said the provision most relevant to the Chapman case prohibits an investment adviser from selling a security in which he has an interest to a client without first obtaining consent.

Investment advisers found to have violated this section face civil penalties including fines, compensation to wronged clients, suspensions or even permanent disbarment from the securities business, Lieb said.

Conflict of interest

The pension fund lost an estimated $5.4 million as a result of purchases by two Chapman-selected managers of stock in companies he controlled - Chapman Holdings Inc. and Investment experts consulted by The Sun have described the transactions as a clear conflict of interest.

Until he was fired in January, Chapman worked for the Maryland pension system as a money manager who, in effect, hired "sub-managers" to invest hundreds of millions of dollars in state pension funds. The pension system provides retirement benefits to state employees and public school teachers.

The bulk of the purchases in Chapman stock were made by Albriond Capital Management, a now-defunct firm that was run by Alan B. Bond, who has since been convicted of federal fraud charges in another case.

Stock worth pennies

Bond invested $560,000 of state pension money in the 1998 initial public offering of Chapman Holdings, then poured another $5.1 million into the 2000 IPO of

Albriond and another Chapman sub-manager, Zevenbergen Capital, paid $13 a share for the stock - which never traded higher than $9 on the open market. By the time the pension system disposed of the stock, it was worth pennies.

Chapman, who owns two-thirds of the company, had the most to gain if the stock had taken off with the help of pension fund money.

The documents released yesterday - copies of which have also gone to the U.S. attorney - shed new light on the $27 billion pension system's failed oversight of Chapman.

According to the documents, Boykin met with Chapman in August 2001 after Bond, who was already facing criminal charges brought in 1999, was indicted for a second time - an event that prompted Chapman to fire Albriond.

Internal reports and e-mails show that Chapman told the pension system's Boykin that Bond had bought stock in Chapman-controlled companies. But Boykin failed to take action or notify the state pension board for more than four months.

In her memo to Vaughn, the pension system's executive director, Boykin said she did not realize that Chapman was talking about the use of state pension funds.

"I thought that he meant Bond personally owned I did not realize that he meant that Bond had purchased the stock with funds from our account," Boykin wrote.

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