Timing of stock buy stirs inquiry

U.S. looks at order to buy 130,000 eChapman shares

Md. pension funds used in deal

13-day lag raises concern over transaction's legality

October 08, 2002|By Michael Dresser and William Patalon III | Michael Dresser and William Patalon III,SUN STAFF

Federal authorities appear to be investigating whether Maryland pension funds were illegally used to buy stock in a company controlled by Nathan A. Chapman Jr. for almost twice the market rate -- at a cost to the pension system of several hundred thousand dollars.

The inquiry stems from an unusual transaction in which a money manager hired by Chapman purchased the stock and -- according to the manager's records -- didn't settle the sale for 13 days.

The records show that 130,000 shares of eChapman.com were purchased by money manager Alan B. Bond on June 15, 2000, for $13 a share. When the sale was settled June 28, the stock's price on the market had fallen to about $7 a share.

Stock trades are typically completed within three business days. Authorities appear to be looking at whether the order to buy the stock was placed June 15 or backdated to justify the $13 price, according to sources.

Experts consulted by The Sun say they can think of no innocent explanation for the length of time between the purchase order and the settlement.

"It certainly smells bad," said Daniel Bateman, a former Securities and Exchange Commission official.

Chapman managed hundreds of millions of dollars for the $27 billion state pension system until he was fired in January. Bond was a "sub-manager" he hired to invest the retirement funds.

The purchase of the 130,000 shares was part of a larger, approximately $5 million purchase by Bond of the stock. Securities experts have described that investment as a blatant conflict of interest and inappropriate "self-dealing" since Bond was supervised by Chapman.

The $1.7 million purchase price of the 130,000 shares is about $780,000 more than the stock would have cost had it been bought two or three days before the settlement date. Bond bought the stock for an investment trust in which Maryland pension funds represented more than three-quarters of the money.

Chapman, who remains chairman of the state university system's Board of Regents, declined to comment.

Bond is in jail in New York awaiting sentencing after being convicted in June on federal fraud charges. His lawyer, Jeffrey Pittell, agreed that the gap between the dates of purchase and settlement was "very unusual" and said he had no explanation.

He suggested that the timing of the settlement would have been up to the broker who handled the sale, not Bond.

"If the stock was bought on the 15th, that's the price you have to look at," Pittell said. "I don't know why it would have taken 13 days to settle."

Steven A. Gershman, an accountant and a certified fraud investigator, said the timing raises suspicions.

"There's usually a two- or three-day lag between transaction and settlement. I've never heard of 13 days," said Gershman, who works for the Towson-based firm of KAWG&F. Under federal rules, he said, trades are supposed to be settled within three business days.

Bateman, of the Gaithersburg-based Mainstay Group, said there could be an innocent reason for a delayed settlement, but that "it isn't likely."

He noted that Bond was buying stock in the initial public offering of a company controlled by the man who hired him.

"If there is self-dealing in an IPO, a 13-day gap in a rapidly falling market doesn't pass the smell test," he said.

Saul Cohen, a partner in the securities practice of Proskauer Rose, a New York law firm, said the delayed settlement "struck me as strange." Cohen said a trade that settled June 28 would likely have taken place about June 26.

On June 26, 2000, the stock closed at $7 on heavy volume of 316,700 shares. The trading record shows that Bond's firm paid $13 -- the price paid by others who bought stock June 15 in advance of the company's June 20 initial public offering.

Gershman said that if Bond deliberately paid more than the market price, it would be more than a violation of securities law. He noted that because such transactions are conducted through the mail and over interstate telecommunications systems, federal mail fraud and wire fraud statutes could apply.

Joseph M. Coale, spokesman for the state pension system, said he could not explain the 13-day lag. He said the state attorney general's office has hired a financial investigator on behalf of the system. Chapman's dealings with the pension system are also under investigation by the Securities and Exchange Commission, the U.S. attorney in Baltimore and state securities regulators.

According to Chapman, Bond had been investing pension money in Chapman-controlled companies since 1998 without protest from the retirement system. The state pension board fired Chapman in January when it learned about the SEC investigation of those investments.

One of Chapman's first actions after becoming a money manager for the pension system in 1996 was to sign Bond's firm as a sub-manager.

By the time Chapman fired Bond in August last year -- after Bond was indicted on federal charges for a second time -- Bond controlled the single largest block of publicly traded shares in eChapman.com.

The close relationship between the two firms "raises a lot of questions as to the nature" of Bond's investment in Chapman's company, Cohen added.

When two companies are so closely affiliated, he said, "the buyer is just another pocket of the seller."

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