Buying, dumping stock raises doubts of Chapman oversight

Md. pension manager did not take action on questionable trading

October 01, 2002|By Michael Dresser and William Patalon III | Michael Dresser and William Patalon III,SUN STAFF

A New York money manager supervised by Nathan A. Chapman Jr. used millions of dollars in Maryland pension fund money to repeatedly buy and sell the same stocks - transactions that suggest he might have been seeking to generate commissions at the expense of the retirement system, trading records show.

Alan B. Bond, president of the now-defunct Albriond Capital Management, would routinely buy thousands of shares in a company, only to dump the stock within days - or the same day - with little apparent concern for whether the price went up or down.

Trading in order to generate commissions at a client's expense is a fraud known as "churning." Securities industry experts who, at The Sun's request, reviewed detailed records of Albriond's trading over 16 months during 2000 and 2001 say the volume of transactions should have set off alarms.

"Certainly there is evidence of excessive trading or churning," said Daniel Bateman, a former Securities and Exchange Commission official. He is a partner in the Mainstay Group, a Gaithersburg--based securities industry consultant.

Abba David Poliakoff, who chairs the Maryland State Bar Association's securities law committee, said the trading records raise "serious concerns."

"It jumps out at you that here are a significant number of trades going both ways in a short period of time. That obviously begs the question of whether there was churning or not," said Poliakoff, a securities lawyer with Gordon Feinblatt.

Chapman, a manager for the pension system who selected and supervised Bond, was responsible for seeing that such trading didn't happen.

Joseph M. Coale, a pension system spokesman, said the retirement agency did not seek copies of the Albriond trading records until after Chapman was fired in January. He said the system was relying on Chapman to watch the managers who worked for him.

"He had the legal, fiduciary responsibility to oversee that trading," Coale said. "He was paid to do that."

Never charged

Chapman, who is chairman of the state university system's Board of Regents and a political ally of the governor, declined to say yesterday whether he was aware of the details of Bond's trading.

However, he denied that Bond had been churning, noting that the trader - currently in jail and awaiting sentencing on other charges - was never charged with that offense.

"Alan Bond's activities have been reviewed by the U.S. attorney's office, by the SEC and by virtually every other regulatory agency," Chapman said. "To my knowledge, there's been no evidence found that he's been churning. Alan Bond has been accused of a lot of things, but churning is not one of them."

Bond was convicted in New York in June on federal fraud charges as the central figure in a "cherry-picking" scheme - in which profitable trades went to Bond's account and losing trades were steered to his clients, including the Maryland pension system.

He has yet to be sentenced on those charges and is awaiting trial on earlier federal charges of taking kickbacks from brokers.

Chapman's dealings with the state pension system are currently the subject of investigations by the SEC, the U.S. attorney in Baltimore, Maryland securities regulators and the state attorney general. Coale said the pension system has brought in a forensic accountant - the financial equivalent of a crime scene investigator - to pore over records about Bond's and Chapman's trading.

The records released last week detailing Bond's trading over 16 months do not show which brokerage houses handled those transactions for his firm.

In both of his indictments, Bond was linked to allegedly corrupt brokers. In particular, New York-based Neuberger Berman LLC was accused of helping him conceal his cherry-picking scheme.

Chapman is a longtime friend and ally of Gov. Parris N. Glendening, who named him to the Board of Regents and helped him land the post of chairman.

The 45-year-old investment banker managed hundreds of millions of dollars for the state pension system from 1996 until this year as head of a so-called "fund of funds."

His job was, in effect, to select and supervise minority "sub-managers" who invested pension system money.

Financial relationship

During the period of Albriond's most questionable trading - October 2000 through July 2001 - Bond and Chapman were involved in a financial relationship that experts have described as a blatant conflict of interest.

In June 2000, Bond's Albriond spent more than $5 million of pension system money on stock in, a company controlled by Chapman. As Bond launched his spree of aggressive trading, his firm controlled the largest block of publicly traded Chapman stock outside Chapman's own hands.

The records reflect all of Bond's trading from March 31, 2000, to July 31, 2001, on behalf of Chapman's Domestic Emerging Markets-Minority Equity trust fund. The Maryland pension fund was the largest participant in that fund, accounting for roughly two-thirds to three-quarters of the assets.

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