To many in the financial world, it was big news when New York prosecutors indicted money manager Alan B. Bond in 1999 on charges of defrauding pension systems.
But in Maryland, trustees of the state pension system reacted with a shrug. The pension board never discussed the indictment, members acknowledge, though the system had about $30 million in Bond's care.
The federal charges against Bond - prominently reported in such newspapers as The New York Times and The Wall Street Journal - prompted at least a half-dozen of his other clients to fire him. Maryland's trustees say they never considered letting him go, despite the potential risk to a pension fund that provides benefits to more than 80,000 people.
Pension system officials will get a chance to explain their inaction at a hearing tomorrow in Annapolis of the General Assembly's Joint Pension Committee.
Several experts interviewed by The Sun found the board's passivity an inexplicable failure of fiduciary responsibility.
Keeping Bond as a money manager after his indictment was an "egregious" oversight, said James D. Cox, a professor of corporate securities law at Duke University.
"To the extent that any of the trustees knew about this, they were either really asleep at the switch or turned a blind eye," Cox said. "With either one, it's an extreme case of misfeasance on their part."
Donald C. Langevoort, a Georgetown University law professor, called the indictment a "red flag" that demanded careful consideration by the trustees. "At the very least, they should have ordered a full investigation, should have done their homework," he said.
The inattention to the indictment illustrates a persistent lack of oversight of Bond and the man charged with supervising him for the $26 billion pension system, Baltimore investment banker Nathan A. Chapman Jr.
And the board's de facto decision to keep Bond would prove costly.
A few months after he was indicted in December 1999, Bond launched a second illegal scheme - this time, one in which the Maryland system was among the victims. Bond defrauded the state system of at least $5 million, and possibly far more, according to testimony that led to his conviction on those charges this summer.
Bond lost an additional $4.5 million of the system's money in a possibly illegal stock deal under investigation by federal authorities, pension records show.
The State Retirement Agency's official line is that Chapman bears the primary blame for the system's losses because he was the person who hired and supervised Bond. "The agency would hold that if there were problems or concerns, then they should have been brought to the attention of the agency by [Bond's] manager, Mr. Chapman," said Joseph M. Coale, pension system spokesman.
Experts in fiduciary duties say that although Chapman may be at fault, the ultimate responsibility for oversight of a pension system lies with its chairman, other trustees and top staff:
Richard N. Dixon, state treasurer and chairman of the pension board until leaving office in February. The strong-willed former stockbroker controlled the board's agenda and never put the Bond indictment on it for discussion.
He apparently did ask the system's chief investment officer to question Chapman about the indictment. When Chapman replied that the charges were "trumped-up," Dixon allowed the matter to drop.
Cox, the Duke law professor, called Dixon's conduct "inexcusable," saying he should have ordered a thorough investigation. "That's the job of the chairman."
Dixon maintains that he had no more responsibility than any other member of the board did: "The obligation is on all trustees equally."
Board members - a mix of state officials, investment professionals and government employees elected by pension plan participants. Several trustees knew of the indictment but failed to raise it as an issue before the board.
"If it were me, if it were my money, if I were a participant in this pension fund, I'd sure be asking why this was never discussed," said Richard E. Pummill, an Ohio-based pension consultant.
Comptroller William Donald Schaefer, who succeeded Dixon as system chairman, said that in retrospect, the board should have taken action. "Is this a responsibility of the board itself? I think it is," he said.
Other trustees, however, say they feel it was Chapman's job to decide whether to fire Bond.
Carol Boykin, the system's chief investment officer. New on the job in 1999, she talked to Chapman and one of his consultants about the Bond indictment and determined that Maryland was not a victim of the scheme, records show. She did not produce a written report to the board, instead reporting her findings to Dixon orally.
Cox and others said Boykin should have obtained a copy of the indictment and circulated news articles about it to all board members - neither of which was done.
Boykin declined to be interviewed for this article.
Peter Vaughn, the pension system's executive director. System records show he took a passive role in the Bond matter and took no steps to initiate an investigation.
Vaughn said he left the matter to Boykin and Dixon and sees nothing wrong with doing so.
The failure to react to the Bond indictment was not the system's only lapse in its dealings with Chapman, a friend of Gov. Parris N. Glendening's and a state university system regent.
The staff repeatedly overlooked information in Chapman's reports showing that Bond was investing state pension funds in companies controlled by Chapman, his supervisor at the pension system. Experts have called those investments a clear conflict of interest.
Staff members also failed to notice that Chapman gave Bond $10 million more to invest in July 2000, a month after Bond made his biggest purchase of Chapman stock - timing that some observers have suggested has the appearance of a quid pro quo.
Bond, convicted of multiple counts of fraud from both indictments, is in jail in New York awaiting sentencing.
Chapman is under investigation by the U.S. attorney in Baltimore, the Maryland attorney general, state securities regulators and the Securities and Exchange Commission. He denies any wrongdoing.
The board fired Chapman in January after learning that the SEC was investigating Bond's investment in Chapman's companies.
By then, the stock was worth just pennies a share.
A rising star
It's no wonder that an up-and-coming financier would want a piece of the action in the Maryland pension fund.
The system, with more than 250,000 participants, provides retirement benefits for 86,000 retired state employees, police officers and schoolteachers. About 40 percent of its $26 billion in assets is entrusted to money managers, who invest the money in stocks, bonds or real estate.
From December 1996 until his firing this year, Chapman was one of those managers. His job as head of a so-called "fund of funds" was to choose and supervise a team of minority "submanagers" who picked stocks for the system to invest in.
The intent was to give smaller, minority-owned funds an opportunity at a business that had long been dominated by large firms. One of Chapman's first moves after taking over the Minority Equity Trust fund of funds was to hire Bond, a rising star on Wall Street, in January 1997.
Bond - then a frequent guest on Wall Street Week With Louis Rukeyser - had some good and bad years in the stock market. In 1997, he lagged behind the S&P 500, but he exceeded it by wide margins in the boom years of 1998 and 1999. For that two-year period, he returned 34.42 percent and was No. 2 of 10 submanagers in Chapman's fund.
But investigators were closing in on him. The December 1999 indictment charged, in part, that he conspired with a dishonest broker to run up commissions paid by some of his clients and got kickbacks in return.
For some of Bond's clients, the indictment alone was reason to drop him. The trustees of the City University of New York's endowment fund voted to fire Bond less than two weeks after he was charged.
"It was a serious criminal investigation ... and we take a very conservative approach when it comes to our endowment," said Michael Arena, a CUNY spokesman. "We felt that, based on the information we had, we had no other alternative but to act quickly and decisively."
At least half a dozen other clients agreed. Between Sept. 30, 1999, and March 30, 2000, the value of the assets under Bond's management dropped from $414 million to $244 million even though the markets were rising.
Chapman stuck with Bond, however, and the Maryland pension board did nothing to challenge that decision.
Chapman has said that Bond gave him "reasonable explanations" for the allegations. "He would hardly be the first minority to be indicted to be later found innocent," he said. Chapman said that after talking with pension officials about the matter, "I did not hear any more about it."
It was not as if the trustees had no opportunity to weigh in.
On Dec. 17, 1999 - a day the board's investment committee met in Baltimore - newspapers carried prominent articles about Bond's indictment.
Minutes of the committee meeting contain no mention of Bond. None of the participants interviewed by The Sun recalls any discussion of the indictment at that meeting or at the full board's meeting the next week. Nor did the subject come up at any of the monthly meetings of the committee and the board over the next year, trustees said.
Some trustees recall being told by staff of Chapman's assurances that Bond would be vindicated.
"Chapman indicated that they were trumped-up charges that in the long run would be straightened out," said trustee William D. Brown, who represents teachers on the board.
But others, including Investment Committee Chairman Arthur N. Caple Jr., say they didn't know about the indictment. "Had we had a full discussion, we probably would have taken some kind of action," he said.
Schaefer, who was then vice chairman, said he did not know until last year that Bond was investing money for the pension system. "We weren't alerted," the former governor said.
Court records show that in March 2000, three months after Bond's indictment, he began stealing from at least three of his remaining clients - including the Chapman fund in which Maryland pension money was invested.
The theft continued until August of last year, when federal authorities shut down Bond's business and indicted him a second time. Prosecutors charged that he had devised a "cherry-picking" scheme in which he steered profitable trades to himself and unprofitable ones to clients.
It took a federal jury less than an hour to convict him in June.
Jacob I. Friedman, an expert on the duties of pension fund officials, said the inaction of Maryland system officials after the first indictment could have legal consequences.
Friedman, chairman of the tax department of the New York law firm Proskauer Rose, said that when a pension fund is defrauded, its officials may have to show that they took prudent actions to protect the system's assets.
"There may be people who are personally liable," Friedman said. "This is very serious."
Failure to spot trades
If the board is the brain of the pension system, the staff of the State Retirement Agency is its eyes and ears.
The record of the Chapman case shows the staff frequently missed key evidence and left the board in the dark.
Staff members failed to scrutinize reports in which Chapman disclosed that Bond was using pension money to invest in Chapman-controlled companies since 1998.
Because no one was studying the reports, the system did not know of Bond's biggest investment in a Chapman company - the June 2000 purchase of more than $5 million in stock in eChapman.com.
Bond paid $13 a share in the initial public offering, about $4 more than the stock ever fetched on the open market. By the time the board found out, it was worth just pennies a share.
Just a month after Bond bought that stock, Chapman gave him another $10 million of state pension money to invest - a deal potentially worth more than $45,000 in fees to Bond.
Pension officials say they learned about that $10 million only this year, although the transaction was listed in Chapman's September 2000 report to the system.
Last fall, Chapman delivered records to the system's staff making it explicit that Bond had used pension money to buy Chapman stock. The trustees weren't told for three months, in January of this year. Only then did the board fire Chapman.
According to Coale, the spokesman, Chapman never sought the pension system's permission to let Bond invest pension money in Chapman-controlled companies. But in tables in his quarterly reports, Chapman disclosed the investments as early as 1999.
Coale said the retirement agency's Investment Division did not have enough resources to examine in detail the reports of a "fund-of-funds" manager such as Chapman.
"They monitor the direct funds," Coale said, adding that the staff counted on Chapman to monitor the performance of his submanagers.
Chapman's reports would have gone directly to the Investment Division, where a staff of about 10 oversees the system's assets. For the past three years, the division has been run by Boykin, who briefly worked for Chapman in the mid-1990s but left on poor terms. Her salary is $116,171.
The retirement agency overall is headed by an executive director who is hired by the board and serves at its pleasure. Since 1993 that has been Vaughn, who earns $119,657 a year.
Vaughn said he left the Bond matter up to Dixon and Boykin and said he doesn't recall talking about the first indictment with either.
"I don't micromanage my staff. I expect to be advised on big issues," he said.
Dixon said that in retrospect, the Bond indictment should have been brought up before the board's Investment Committee, of which he was a member but not the chairman. He said it was Boykin's responsibility to see that the matter appeared on the committee agenda.
Vaughn shares the responsibility because Boykin reported to him, Dixon said. "I was not her boss," Dixon said. "He was her boss."
Other trustees had differing recollections of why the board took no action when Bond was indicted. Some say they didn't demand action because Bond had been charged, not convicted.
But Pummill, president of Ohio-based Miami Valley Pension Service Corp., said the principle of "innocent until proven guilty" does not apply in cases of fiduciary duty.
"The sole responsibility is to the participants of that plan," he said. "There is no responsibility to some kind of sense of American justice."
'Need to clean house'
Republican critics lay the blame for the pension system's troubles at the door of Glendening - a longtime friend of Chapman's who appointed the businessman to the state university system's Board of Regents.
"We need to clean house here," said Del. Robert L. Flanagan, a Republican member of the House Appropriations Committee.
"There was a culture of corruption in which Mr. Chapman was a friend of the governor and was considered untouchable," Flanagan asserted. "So from top to bottom, nobody was supposed to question what he did."
Chuck Porcari, Glendening's spokesman, said the governor declined to be interviewed about the pension system's problems. It would be "inappropriate" for him to comment, Porcari said.
"The state pension board is an independent entity," he said. "The governor has no role in it or their decision-making process."
The governor's power to influence the pension system is limited by law. He appoints only five of the 14 members and has no say over who is on the staff.
The treasurer and comptroller are members of the board by law. Most of the other trustees are elected by retired and active state employees, police and teachers.
A call for change
The pension board has not taken any action against the system's staff for its handling of matters involving Chapman and Bond. But Schaefer says changes are needed.
Schaefer said he doesn't like what he has seen since becoming chairman, adding that the staff should have been more diligent about bringing information to the board. "Something has to be done about the management of this organization," he said.
Last month, the pension board voted to seek a consultant to study the system's operations and personnel - including the trustees - in the wake of the controversy that surrounds Chapman and Bond.
Hiring the consultant is expected to take until February. The report isn't expected until August. Schaefer pushed the board to move more quickly but was outvoted. He says he'll keep pushing for faster action.
"It's very frustrating for me," he said. "I think it's taking way, way too long. And the longer it takes, the worse it seems."
But in Maryland, trustees of the state pension system reacted with a shrug. The pension board never discussed the indictment, members acknowledge, though the system had about $30 million in Bond's care.
The federal charges against Bond - prominently reported in such newspapers as The New York Times and The Wall Street Journal - prompted at least a half-dozen of his other clients to fire him. Maryland's trustees say they never considered letting him go, despite the potential risk to a pension fund that provides benefits to more than 80,000 people.
Pension system officials will get a chance to explain their inaction at a hearing tomorrow in Annapolis of the General Assembly's Joint Pension Committee.
Several experts interviewed by The Sun found the board's passivity an inexplicable failure of fiduciary responsibility.
Keeping Bond as a money manager after his indictment was an "egregious" oversight, said James D. Cox, a professor of corporate securities law at Duke University.
"To the extent that any of the trustees knew about this, they were either really asleep at the switch or turned a blind eye," Cox said. "With either one, it's an extreme case of misfeasance on their part."
Donald C. Langevoort, a Georgetown University law professor, called the indictment a "red flag" that demanded careful consideration by the trustees. "At the very least, they should have ordered a full investigation, should have done their homework," he said.
The inattention to the indictment illustrates a persistent lack of oversight of Bond and the man charged with supervising him for the $26 billion pension system, Baltimore investment banker Nathan A. Chapman Jr.
And the board's de facto decision to keep Bond would prove costly.
A few months after he was indicted in December 1999, Bond launched a second illegal scheme - this time, one in which the Maryland system was among the victims. Bond defrauded the state system of at least $5 million, and possibly far more, according to testimony that led to his conviction on those charges this summer.
Bond lost an additional $4.5 million of the system's money in a possibly illegal stock deal under investigation by federal authorities, pension records show.
The State Retirement Agency's official line is that Chapman bears the primary blame for the system's losses because he was the person who hired and supervised Bond. "The agency would hold that if there were problems or concerns, then they should have been brought to the attention of the agency by [Bond's] manager, Mr. Chapman," said Joseph M. Coale, pension system spokesman.
Experts in fiduciary duties say that although Chapman may be at fault, the ultimate responsibility for oversight of a pension system lies with its chairman, other trustees and top staff:
He apparently did ask the system's chief investment officer to question Chapman about the indictment. When Chapman replied that the charges were "trumped-up," Dixon allowed the matter to drop.
Cox, the Duke law professor, called Dixon's conduct "inexcusable," saying he should have ordered a thorough investigation. "That's the job of the chairman."
Dixon maintains that he had no more responsibility than any other member of the board did: "The obligation is on all trustees equally."
"If it were me, if it were my money, if I were a participant in this pension fund, I'd sure be asking why this was never discussed," said Richard E. Pummill, an Ohio-based pension consultant.
Comptroller William Donald Schaefer, who succeeded Dixon as system chairman, said that in retrospect, the board should have taken action. "Is this a responsibility of the board itself? I think it is," he said.
Other trustees, however, say they feel it was Chapman's job to decide whether to fire Bond.
Cox and others said Boykin should have obtained a copy of the indictment and circulated news articles about it to all board members - neither of which was done.
Boykin declined to be interviewed for this article.
Vaughn said he left the matter to Boykin and Dixon and sees nothing wrong with doing so.
The failure to react to the Bond indictment was not the system's only lapse in its dealings with Chapman, a friend of Gov. Parris N. Glendening's and a state university system regent.
The staff repeatedly overlooked information in Chapman's reports showing that Bond was investing state pension funds in companies controlled by Chapman, his supervisor at the pension system. Experts have called those investments a clear conflict of interest.
Staff members also failed to notice that Chapman gave Bond $10 million more to invest in July 2000, a month after Bond made his biggest purchase of Chapman stock - timing that some observers have suggested has the appearance of a quid pro quo.
Bond, convicted of multiple counts of fraud from both indictments, is in jail in New York awaiting sentencing.
Chapman is under investigation by the U.S. attorney in Baltimore, the Maryland attorney general, state securities regulators and the Securities and Exchange Commission. He denies any wrongdoing.
The board fired Chapman in January after learning that the SEC was investigating Bond's investment in Chapman's companies.
By then, the stock was worth just pennies a share.
The system, with more than 250,000 participants, provides retirement benefits for 86,000 retired state employees, police officers and schoolteachers. About 40 percent of its $26 billion in assets is entrusted to money managers, who invest the money in stocks, bonds or real estate.
From December 1996 until his firing this year, Chapman was one of those managers. His job as head of a so-called "fund of funds" was to choose and supervise a team of minority "submanagers" who picked stocks for the system to invest in.
The intent was to give smaller, minority-owned funds an opportunity at a business that had long been dominated by large firms. One of Chapman's first moves after taking over the Minority Equity Trust fund of funds was to hire Bond, a rising star on Wall Street, in January 1997.
Bond - then a frequent guest on Wall Street Week With Louis Rukeyser - had some good and bad years in the stock market. In 1997, he lagged behind the S&P 500, but he exceeded it by wide margins in the boom years of 1998 and 1999. For that two-year period, he returned 34.42 percent and was No. 2 of 10 submanagers in Chapman's fund.
But investigators were closing in on him. The December 1999 indictment charged, in part, that he conspired with a dishonest broker to run up commissions paid by some of his clients and got kickbacks in return.
For some of Bond's clients, the indictment alone was reason to drop him. The trustees of the City University of New York's endowment fund voted to fire Bond less than two weeks after he was charged.
"It was a serious criminal investigation ... and we take a very conservative approach when it comes to our endowment," said Michael Arena, a CUNY spokesman. "We felt that, based on the information we had, we had no other alternative but to act quickly and decisively."
At least half a dozen other clients agreed. Between Sept. 30, 1999, and March 30, 2000, the value of the assets under Bond's management dropped from $414 million to $244 million even though the markets were rising.
Chapman stuck with Bond, however, and the Maryland pension board did nothing to challenge that decision.
Chapman has said that Bond gave him "reasonable explanations" for the allegations. "He would hardly be the first minority to be indicted to be later found innocent," he said. Chapman said that after talking with pension officials about the matter, "I did not hear any more about it."
It was not as if the trustees had no opportunity to weigh in.
On Dec. 17, 1999 - a day the board's investment committee met in Baltimore - newspapers carried prominent articles about Bond's indictment.
Minutes of the committee meeting contain no mention of Bond. None of the participants interviewed by The Sun recalls any discussion of the indictment at that meeting or at the full board's meeting the next week. Nor did the subject come up at any of the monthly meetings of the committee and the board over the next year, trustees said.
Some trustees recall being told by staff of Chapman's assurances that Bond would be vindicated.
"Chapman indicated that they were trumped-up charges that in the long run would be straightened out," said trustee William D. Brown, who represents teachers on the board.
But others, including Investment Committee Chairman Arthur N. Caple Jr., say they didn't know about the indictment. "Had we had a full discussion, we probably would have taken some kind of action," he said.
Schaefer, who was then vice chairman, said he did not know until last year that Bond was investing money for the pension system. "We weren't alerted," the former governor said.
Court records show that in March 2000, three months after Bond's indictment, he began stealing from at least three of his remaining clients - including the Chapman fund in which Maryland pension money was invested.
The theft continued until August of last year, when federal authorities shut down Bond's business and indicted him a second time. Prosecutors charged that he had devised a "cherry-picking" scheme in which he steered profitable trades to himself and unprofitable ones to clients.
It took a federal jury less than an hour to convict him in June.
Jacob I. Friedman, an expert on the duties of pension fund officials, said the inaction of Maryland system officials after the first indictment could have legal consequences.
Friedman, chairman of the tax department of the New York law firm Proskauer Rose, said that when a pension fund is defrauded, its officials may have to show that they took prudent actions to protect the system's assets.
"There may be people who are personally liable," Friedman said. "This is very serious."
The record of the Chapman case shows the staff frequently missed key evidence and left the board in the dark.
Because no one was studying the reports, the system did not know of Bond's biggest investment in a Chapman company - the June 2000 purchase of more than $5 million in stock in eChapman.com.
Bond paid $13 a share in the initial public offering, about $4 more than the stock ever fetched on the open market. By the time the board found out, it was worth just pennies a share.
Pension officials say they learned about that $10 million only this year, although the transaction was listed in Chapman's September 2000 report to the system.
According to Coale, the spokesman, Chapman never sought the pension system's permission to let Bond invest pension money in Chapman-controlled companies. But in tables in his quarterly reports, Chapman disclosed the investments as early as 1999.
Coale said the retirement agency's Investment Division did not have enough resources to examine in detail the reports of a "fund-of-funds" manager such as Chapman.
"They monitor the direct funds," Coale said, adding that the staff counted on Chapman to monitor the performance of his submanagers.
Chapman's reports would have gone directly to the Investment Division, where a staff of about 10 oversees the system's assets. For the past three years, the division has been run by Boykin, who briefly worked for Chapman in the mid-1990s but left on poor terms. Her salary is $116,171.
The retirement agency overall is headed by an executive director who is hired by the board and serves at its pleasure. Since 1993 that has been Vaughn, who earns $119,657 a year.
Vaughn said he left the Bond matter up to Dixon and Boykin and said he doesn't recall talking about the first indictment with either.
"I don't micromanage my staff. I expect to be advised on big issues," he said.
Dixon said that in retrospect, the Bond indictment should have been brought up before the board's Investment Committee, of which he was a member but not the chairman. He said it was Boykin's responsibility to see that the matter appeared on the committee agenda.
Vaughn shares the responsibility because Boykin reported to him, Dixon said. "I was not her boss," Dixon said. "He was her boss."
Other trustees had differing recollections of why the board took no action when Bond was indicted. Some say they didn't demand action because Bond had been charged, not convicted.
But Pummill, president of Ohio-based Miami Valley Pension Service Corp., said the principle of "innocent until proven guilty" does not apply in cases of fiduciary duty.
"The sole responsibility is to the participants of that plan," he said. "There is no responsibility to some kind of sense of American justice."
"We need to clean house here," said Del. Robert L. Flanagan, a Republican member of the House Appropriations Committee.
"There was a culture of corruption in which Mr. Chapman was a friend of the governor and was considered untouchable," Flanagan asserted. "So from top to bottom, nobody was supposed to question what he did."
Chuck Porcari, Glendening's spokesman, said the governor declined to be interviewed about the pension system's problems. It would be "inappropriate" for him to comment, Porcari said.
"The state pension board is an independent entity," he said. "The governor has no role in it or their decision-making process."
The governor's power to influence the pension system is limited by law. He appoints only five of the 14 members and has no say over who is on the staff.
The treasurer and comptroller are members of the board by law. Most of the other trustees are elected by retired and active state employees, police and teachers.
Schaefer said he doesn't like what he has seen since becoming chairman, adding that the staff should have been more diligent about bringing information to the board. "Something has to be done about the management of this organization," he said.
Last month, the pension board voted to seek a consultant to study the system's operations and personnel - including the trustees - in the wake of the controversy that surrounds Chapman and Bond.
Hiring the consultant is expected to take until February. The report isn't expected until August. Schaefer pushed the board to move more quickly but was outvoted. He says he'll keep pushing for faster action.
"It's very frustrating for me," he said. "I think it's taking way, way too long. And the longer it takes, the worse it seems."