Mercantile fires 2 officials in conflict case

Top bank executive OK'd referral fee to other's kin

March 19, 2004|By Paul Adams | Paul Adams,SUN STAFF

Mercantile Bankshares Corp., a venerable Baltimore bank that has for generations managed the fortunes of some of Maryland's wealthiest families, fired two top executives yesterday for not disclosing that the mother of one stood to benefit from the bank's selection of an advisory firm for one of its investment funds.

The fired executives are John J. Pileggi, who was named chief executive of Mercantile's Investment and Wealth Management division in a management shake-up last summer, and Michael R. Donnell, a division senior vice president.

Sources close to the bank said Donnell's mother recommended an advisory firm in Minneapolis to oversee a Mercantile hedge fund, but neither Donnell or Pileggi disclosed that it was Donnell's mother who stood to collect the "nearly six-figure" payment.

The bank said in a statement that Donnell and Pileggi "failed to disclose to senior business or legal management that a member of Mr. Donnell's immediate family was in a position to receive a substantial referral fee from a firm retained by Mercantile to advise one of its registered hedge funds."

"Mr. Pileggi ... expressly consented to the payment of the fee," the statement said.

No clients lost money

Edward J. "Ned" Kelly III, the bank's chairman, president and chief executive, said no Mercantile clients lost money as a result of the secret arrangement, and that the affected hedge fund has earned "double-digit" returns during the past year. Kelly himself is an investor in the fund.

But that is not the point, he said.

"I regard it as my principal responsibility to guard jealously the reputation of this firm, and I take seriously any action that has an adverse effect on that," Kelly said in an interview yesterday.

Pileggi and Donnell could not be reached for comment yesterday. An attorney for Donnell did not return phone messages left with his office.

Mercantile, which first learned of the payment from outside sources Friday, said it is conducting an internal investigation and that it would cooperate with "all relevant authorities."

Asked yesterday whether the Securities and Exchange Commission was looking into the incident, a spokesman said it is agency policy to neither confirm nor deny any investigation.

The payment probably would not be deemed illegal unless Donnell's mother told the advisory firm that it wouldn't get Mercantile's business unless she was paid, or unless it was discovered that Donnell or Pileggi had benefited from the arrangement.

In a letter to bank employees announcing the terminations yesterday, Kelly quoted testimony given by J.P. Morgan to Congress in the midst of the banking and markets crisis in 1933.

"The banker must at all times conduct himself so as to justify the confidence of his clients in him and thus preserve it for his successors," Morgan stated.

Kelly said Mercantile would be adopting a new code of ethics soon and establish an ethics hot line.

Kevin McCreadie, the wealth management division's chief investment officer, has been tapped to replace Pileggi as chief executive.

A series of blows

The firings are the latest blow to a trust division that has lost two top executives in less than a year and continues to struggle for business in a savagely competitive market for wealthy clients.

After being named chief executive in 2001, Kelly made bolstering the bank's "lackluster" wealth management division a top priority, saying it would become a key driver of revenue growth for a bank that has struggled to increase earnings in a low-interest-rate environment. It has faced one setback after another since then.

Kelly hired Wallace Mathai-Davis in February 2002 to rebuild the division, which has long been a staid caretaker of Baltimore's old money. Mathai-Davis, a brash New Yorker who was second in command at Offitbank, which caters to wealthy clients, made a series of high-profile hires in a bid to turn the business around.

Among them was Pileggi, a mutual funds expert who had previously been president and chief executive of PlusFunds Ltd., a firm that manages investments in hedge funds.

Mathai-Davis also cut about 30 jobs in order to pay for new technology and other organizational changes.

During that same period, Mercantile, under pressure from analysts to show results, made a series of big investments in the division, first buying a 19.9 percent stake in Winston Partners, a McLean, Va., firm that manages investments in hedge funds and private companies.

It also formed a strategic alliance with Geneos Wealth Management Inc., an independent broker-dealer based in Denver, and announced the acquisition of Boyd Watterson Asset Management LLC of Cleveland.

But it was soon clear that Mathai-Davis' style didn't sit well with the bank's elite customers, and the executive was abruptly fired last August, taking a seven-figure severance payment in the process. Pileggi and Donnell, a Pileggi protege from New York, were the last of the big-money talent brought in by Mathai-Davis.

"It's another blow, no question," Kelly said of the latest departures.

Moving ahead

Still, he said, Mercantile would continue to aggressively pursue its efforts to build the wealth management business.

"I think, despite some missteps, we've made substantive progress, and I remain absolutely committed to it," he said.

Analysts were still trying to assess the damage late yesterday. Several said it was too soon to tell what impact the fee incident might have on the business. But some credit Kelly for taking decisive steps to deal with it.

"I think he's showing that Mercantile is clean and crisp and above board on these things and that this won't be tolerated," said Claire M. Percarpio, an analyst with Janney Montgomery Scott in Philadelphia.

Still, she said the bank faces a difficult battle in turning the business around.

"I think it's a tough competitive area anyway, and I have a feeling it's going to be a gradual process to see this division contribute more to the bottom line," she said.

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