Violated trust

October 03, 2002

PROTECTING STATE workers' retirement funds is one of the more sacred trusts given to Maryland state government -- a fiduciary duty badly violated by one of Gov. Parris N. Glendening's longtime pals and pension system managers in a costly tale of politics, self-dealing and ineptitude.

The misdealings involved a relatively small slice of the $25 billion managed by the system for 300,000 active and retired teachers, police officers and other state and local government employees; nonetheless, this story shows a shocking lack of oversight.

At its center is Baltimore money manager Nathan A. Chapman Jr., founder of the nation's first publicly traded investment firm headed by an African-American, the governor's choice in 1999 to lead the state university system's Board of Regents and, for five years until January, the man entrusted with investing as much as $200 million or more of the pension system's money.

As detailed over the last year by Sun reporters, Mr. Chapman doled out the pension funds to sub-managers, two of whom then plowed more than $5 million of that money back into the initial public offering of stock in his own company, This conflict of interest -- and apparent violation of federal law -- cost the state millions. The stock, purchased at $13 a share, is worth pennies.

It gets worse. One of the two sub-managers, Alan B. Bond of New York, used pension funds to repeatedly buy and sell the same stocks in trading apparently aimed at generating more commissions. Mr. Bond, jailed on federal fraud charges and awaiting trial on federal kickback charges, turned $47 million into about $14 million in about a year.

But wait, there's more. It now comes out that Mr. Chapman dutifully reported Mr. Bond's investment in eChapman to the pension system, but that didn't prompt action. He also told the system's chief investment officer, who had once worked for him, about it -- still not prompting action.

Now it's finger-pointing time. Carol Boykin, the investment officer, says she thought Mr. Chapman meant Mr. Bond had invested his personal, not state, funds in eChapman; even Mr. Chapman finds that "incredible." Then, Ms. Boykin says, she was told to back off investigating Mr. Bond's investments; the head of the pension system, Peter Vaughn, says that's a misinterpretation of his instructions.

In all this, it's hard to ignore Mr. Chapman's ties with the governor, who had shown interest in being named the University System of Maryland's chancellor by the very Board of Regents led by Mr. Chapman.

Since then, Mr. Chapman has announced he'll soon leave the regents. His firm is struggling. He's under investigation by the Securities and Exchange Commission, the U.S. attorney in Baltimore, state security regulators and the state attorney general's office. Some legislators this week called for their own inquiry, even as the pension system moved to hire an outside consultant to evaluate itself.

An extensive probe of the system's management is necessary, but it must be conducted by a body independent of politics and of the pension agency. State and local government employees have no choice but to contribute to the state retirement system. They should do so with confidence that someone is properly minding the store.

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