Incredulous legislators grilled Maryland pension system executives yesterday about how they could have failed to get rid of a money manager who had been indicted for fraud.
The money manager, Alan B. Bond, would go on to steal millions from the pension fund. But top officials said it wasn't their responsibility to let him go - pointing the finger at Nathan A. Chapman Jr., the Baltimore investment banker who hired Bond to invest pension funds.
Sen. Edward J. Kasemeyer, chairman of the General Assembly's Joint Committee on Pensions, said "it is beyond my comprehension" that the state pension board did not even discuss Bond's 1999 indictment on charges of defrauding other pension systems.
The Howard County Democrat and other legislators expressed frustration as Peter Vaughn and Carol Boykin, executive director and chief investment officer of the $26 billion fund, defended the state retirement agency's oversight of Chapman and Bond.
Comptroller William Donald Schaefer, chairman of the pension board, told lawmakers he shared their concerns. In the most explicit terms he has used so far, Schaefer criticized Vaughn's performance in keeping the trustees informed.
"That's the job of the executive director - to tell me and tell the board there's trouble brewing somewhere," he said.
Schaefer and other officials stressed that Maryland pensioners would not be hurt because the losses in the Bond case are only a small portion of the system's assets.
Nevertheless, Boykin said, "the system was harmed from a perception perspective."
Several months after his 1999 indictment in New York, Bond launched a "cherry-picking" scheme: He steered returns from profitable trades to his account and losses from losing trades to his clients' accounts.
The Maryland pension system's losses have been estimated at $5 million to $30 million.
Chapman was fired in January after the trustees learned that he had permitted Bond to invest about $5 million in pension money in Chapman-controlled companies. The investment, which experts have called a clear conflict of interest, cost the system about $4.5 million.
All of those losses took place while Bond was already under indictment. He was convicted of the cherry-picking scheme in June and pleaded guilty to the 1999 indictment last month.
Legislators at yesterday's hearing expressed amazement that pension system officials failed to act quickly after the first indictment to remove system assets from Bond's care.
"It seems to me you would have been horrified by that," said Sen. Donald F. Munson, a Washington County Republican.
Lawmakers were openly skeptical of Boykin's contention that there was nothing pension officials could do to put pressure on Chapman to fire Bond. Kasemeyer pressed Boykin about whether officials had ever asked Chapman to stop doing business with the indicted manager.
"It was not in our purview," Boykin replied.
Committee members were scornful when Boykin told them Chapman had assured her shortly after the indictment that the charges against Bond had been "trumped up."
Boykin absorbed the brunt of legislators' indignation as Vaughn sat quietly beside her. The executive director spoke only briefly, telling the committee that "this type of behavior is not preventable in spite of the laws on the books."
Asked whether he knew about Bond's indictment the next day, when it was reported in newspapers, Vaughn said he didn't recall.
Several times during the hearing, Vaughn and Boykin declined to answer questions about the staff's oversight of Chapman and Bond. They said the agency's counsel had warned them that public discussion of some issues could affect potential litigation.
Handling of Chapman
Legislators said they were concerned about the board's treatment of Chapman, a prominent African-American businessman and a friend of Gov. Parris N. Glendening.
Kasemeyer said it appeared to him "that Mr. Chapman was sort of given favorable treatment or [else] some sloppy work was done all the time by the agency."
Schaefer said he shared some of Kasemeyer's suspicions.
"I honestly think [Chapman] was treated a little differently," Schaefer said. "You handle people a little bit differently when you don't have a lot of minorities on board."
Munson asked whether "well-placed people" had tried to exert influence on Chapman's behalf.
Carl Lancaster, a pension trustee who had been sitting in the audience, volunteered that he and fellow board member G. Bruce Harrison had been invited to Annapolis in 2000 by a Glendening-appointed trustee who urged them to restore $100 million that the board had voted to take away from Chapman.
Lancaster declined to identify the official, but Harrison said it was Frederick W. Puddester, at the time Glendening's budget secretary.
Puddester could not be reached for comment last night. He has previously said he sought to reverse a move by then-Treasurer Richard N. Dixon to cut the amount of money in Chapman's care. Puddester said he opposed the cut because Chapman was exceeding his investment goals at the time.