Pension system lacked rule against investments

State official calls actions by Chapman improper

disclosures overlooked

July 07, 2004|By Michael Dresser | Michael Dresser,SUN STAFF

As a money manager for the Maryland pension system, Nathan A. Chapman Jr. acted improperly in allowing a subordinate to invest pension money in Chapman's companies, a state official testified yesterday.

But the system had no specific rule against the practice, the official said. And he acknowledged that pension administrators overlooked repeated written disclosures that state retirement funds were being invested in Chapman stock.

The testimony by Arthur M. Lynch Jr., the pension system's deputy chief investment officer, came as Chapman's trial entered its fourth week in U.S. District Court in Baltimore. Chapman is charged with defrauding the pension system and with looting his publicly traded companies to support a lavish lifestyle.

The retirement system lost nearly $5 million as a result of its investments in Chapman stock.

Lynch was called by federal prosecutors to testify about the system's relationship with Chapman, who from 1996 to 2002 ran a "fund of funds" in which he hired smaller, minority-owned money management firms to invest pension funds.

Chapman was fired by the pension board in January 2002 after the trustees learned of the investments in his companies.

Lynch said those investments were violations of Chapman's fiduciary duty to act in the best interests of the pension system's more than 250,000 participants.

"We would call that self-dealing perhaps, and I would not consider that in the interests of the beneficiaries," Lynch said.

But during cross-examination, Chapman attorney William R. "Billy" Martin showed the jury a February 2002 e-mail in which Lynch told his former boss that the Chapman stock purchases did not violate the state investment guidelines then in effect.

Lynch said neither Chapman nor his investment consultant, Tremont Capital Management, discussed the investment in Chapman's companies with pension officials.

Lynch also said the pension system's staff never noticed the disclosures in quarterly reports that one of Chapman's money managers, Alan B. Bond, had been investing in Chapman stock from 1998 to 2001.

"It was buried on Page 63 of a 100-page report," Lynch said.

The explanation brought scorn from Martin, who urged Lynch to "tell the jury which page is important."

"All of the pages are important," Lynch conceded.

Under Martin's prodding, Lynch also blamed Tremont for failing to alert his agency to the investment in Chapman stock. "We were paying their fee indirectly," Lynch said. "I would call it a lapse on the part of Tremont."

Catherine G. Sweeney, a Tremont executive, has testified that she warned Chapman that the investments could be seen as a conflict of interest. She said she did not inform the pension system because of confidentiality provisions of her firm's contract with Chapman.

Today's witnesses are expected to include Bond, the jailed former money manager from New York who is alleged to have helped Chapman funnel pension funds into Chapman's companies.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.