Mercantile ex-VP calls firing unjust

Donnell's lawyer says bank was informed of referral fee for his mother

`Nearly six-figure' payment

Consultant rewarded her after it won business with division where he worked

March 20, 2004|By Paul Adams | Paul Adams,SUN STAFF

A lawyer for one of two fired Mercantile Bankshares Corp. executives yesterday disputed the bank's claim that his client never informed superiors that his mother stood to gain if the bank selected a Minneapolis advisory firm to oversee one of its investment funds.

But Mercantile stood by the firings of John J. Pileggi, the head of the bank's wealth management business, and his subordinate, Michael R. Donnell, a senior vice president in the division. The two executives were fired Thursday for failing to tell bank officials that Donnell's mother had collected a "nearly six-figure" referral fee from the firm, which was hired by the bank in the summer of 2002.

"Prior to the payment of any fee, he [Donnell] disclosed to both his superiors and to the legal department the question of whether his mother could receive the referral fee," said James P. Ulwick, Donnell's attorney. "He is very disappointed to lose his job, since he enjoyed working at the bank, had worked very hard for the bank and received very high performance ratings."

Ulwick said it's possible that the Securities and Exchange Commission, which regulates hedge funds, and the U.S. attorney in Baltimore will look into the matter. But he said that his client did not benefit from the referral payment and that nothing illegal was done. In keeping with policy, the SEC and the U.S. attorney's office declined to confirm or deny any investigation.

Edward J. "Ned" Kelly III, the bank's chairman, president and chief executive, insisted yesterday that the two executives had not disclosed the arrangement involving Donnell's mother and said the legality of such a fee was not the issue.

"In deciding to terminate Messrs. Pileggi and Donnell, I did not have to conclude that their actions were illegal," he said in a statement. "That is for others to decide. I terminated them because they failed repeatedly over the course of more than a year to inform me of the potential for a relative of Mr. Donnell to receive a fee from the investment adviser; of Mr. Pileggi's consent to the fee; or of the circumstances surrounding the fee."

Kelly said the two omitted the information in presentations to him and the bank's board of directors during the course of "numerous direct conversations" about the fund business.

"Whether these omissions were deliberate or a function of insensitivity to the important issues involved, I believe there is no place for such people in positions of trust and responsibility at Mercantile," he said.

Details of the incident were still emerging yesterday. Sources said that in mid-2002, Mercantile was seeking advisory firms to manage several new hedge funds that would be marketed to wealthy clients.

At that time, Donnell's mother referred a close friend, who headed an advisory firm in Minneapolis, to Mercantile's investment and wealth management division. After hearing presentations from several such firms, the bank's executives chose the one connected to Donnell's mother to oversee $40 million to $50 million in bank and client funds.

Ulwick said Donnell told Pileggi about the potential referral payment to his mother, and Pileggi later wrote a letter to the advisory firm consenting to the payment. An attorney for Pileggi did not return phone calls yesterday.

In addition to embarrassing a venerable Baltimore institution, the incident has provided a rare glimpse at the methods investment advisory firms employ in a bid to win lucrative money management contracts. Industry analysts said referral payments to registered brokers who bring a firm business are not unusual.

"It's fairly standard practice in the hedge-fund industry to use third-party marketers to raise assets for hedge funds," said Johann Wong, founder and chief executive of HedgeWorld.com, an online information service for the fund industry.

One reason is that hedge-fund operations are usually small compared with equity mutual funds, and the pursuit of assets is cutthroat, analysts said.

"It's a loosely defined, loosely structured industry and if a hedge-fund manager feels they could use help in finding business through referral fees, then they'll do it," said Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine. "The issue here is that it all has to be disclosed."

What makes this case unusual is the size of the fee and the fact that Donnell's mother, who has a business marketing trade shows, is not normally involved in the financial industry, legal experts said.

"That looks so disproportional to the services that the mother rendered," said John C. Coffee Jr., a professor of law at Columbia University in New York. "And it was not services that she performed during her normal course of business. It was more or less social."

However, Coffee said, the fact that Donnell informed Pileggi, his boss, about the payment shows there was no criminal intent.

Cassidy, the industry analyst, said it's unlikely the bank will suffer long-term consequences from the revelations. He credited management with taking decisive action.

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