Just a year ago, city pension trustees endorsed what might have been Jacqueline F. McLean's most important accomplishment as comptroller -- a plan to invest $10 million in a black-owned brokerage firm.
But now, as Mrs. McLean's career lies in shambles, that proposal also is in trouble. City officials are rethinking the proposed investment in the Baltimore-based Chapman Co. because of Mrs. McLean's legal problems and new concerns that she advanced the plan using a pattern of secrecy and deception.
"There is no way I will vote for this now with all that is going on with Jackie," says William E. Dix, a pension trustee who voted for the investment last year.
Although some trustees say the Chapman proposal is being unfairly tainted, others say they are reconsidering because of:
* Allegations of unrelated misconduct against the comptroller, who chaired the pension boards that approved the investment initially. Mrs. McLean was indicted Feb. 25 on charges she stole more than $25,000 from the city and improperly arranged a lucrative city lease of a family-owned building.
* Indications that she misled fellow trustees about company owner Nathan A. Chapman Jr.'s role as a campaign fund-raiser.
* Allegations that she also misled trustees in selecting a consultant to evaluate the Chapman proposal.
* Uncertainty about whether the unprecedented proposal -- which would give city retirees a major stake in a young, privately held company -- is as safe as the consultant indicated.
Neither Mrs. McLean, who has been on a leave of absence from her city post since Dec. 20, nor her attorney responded to calls and letters requesting interviews about the Chapman plan.
Several of the 13 city pension trustees continue to defend the proposal, saying that regardless of Mrs. McLean's role, retirees would benefit from an investment in the 7-year-old Chapman Co., which has offices in six states and reported making about $1 million in 1992.
"In my heart, I know it is a good deal," says trustee George F. Eckert.
Mr. Chapman continues to argue for final approval, calling the plan "the most looked-at transaction ever" considered by the pension boards. Strengthening his company would help minority businesses as well as give retirees a hefty profit, he said. Only racism is holding back final approval, he said.
Last year, the investment was approved unanimously by city pension trustees and received unanimous -- but conditional -- approval by the Board of Estimates. Now, it is being reviewed by the city's lawyers and must win final approval -- no longer assured -- from pension trustees and the Board of Estimates. Although City Council President Mary Pat Clarke supports the plan, Mayor Kurt L. Schmoke is withholding judgment until city lawyers clear it. Both sit on the Board of Estimates.
Mr. Schmoke has called the idea of using city funds to invest in minority business "a ray of light." But, he says, he is bothered by the way the pension boards handled the proposal. And he's worried about the legality of having the city's pension fund hold a big stake in a local company.
"It is a unique deal and deserved an awful lot of scrutiny," he says. "I felt the issue was really a matter of law."
Prudence required
From the start, the Chapman proposal was sure to attract criticism in the cautious world of pension fund management.
Pension boards, bound by law to handle retirees' funds prudently, usually parcel out money to professional investment managers who buy bonds, real estate, or stock in big, publicly traded companies such as General Motors Corp.
The city trustees -- who handle about $2 billion in pension funds are so concerned about safety that they allow their stock
pickers to invest only in companies with "long and prosperous reputations" and to hold no more than 1 percent of any company's shares.
@4 The Chapman proposal broke with such traditions.
Considered riskier
The terms called for the retirement system to loan the Chapman Co. as much as $5 million and to buy another $5 million in preferred stock for a 30 percent share of the small, private firm -- which made its first profit in 1991.
Such alternative investments are generally considered riskier than conventional investments. Small companies tend to be more vulnerable to recessions. And it can be difficult to sell shares of companies not traded in public markets such as the New York Stock Exchange.
In addition to the general concerns about alternative investments, some trustees also worried about political opposition to the Chapman proposal.
The investment had to be approved by the five-member Board of Estimates, which is controlled by Mr. Schmoke. Mr. Chapman had been treasurer for Mr. Schmoke's rival in the 1987 mayoral primary, Clarence H. "Du" Burns.
Chance to do well
But these concerns melted as Mrs. McLean and the consultant assured the trustees they had a chance to do well by doing good. The Chapman proposal promised a 15 percent annual return as well as help for a local company.
In retrospect, many trustees are questioning what they were told because of Mrs. McLean's role -- starting with her introduction of the proposal.
On Oct. 30, 1992, she called an emergency meeting of the Employee Retirement System board, one of the two main boards that oversee the city's pension systems. The meeting, to hear the Chapman presentation, was unusual because, since 1978, the ERS and the Fire and Police boards have invested jointly.
Proposal spurned
When questioned by fellow trustees about the need for a separate emergency meeting, Mrs. McLean said the Fire and Police board would not consider the proposal because it included a Chapman Co. employee.
There may have been another reason for the separate meeting -- a reason she did not mention, according to a transcript of the session. Edward C. Heckrotte, chairman of the Fire and Police board, had already turned thumbs down on the proposal.
A few weeks before the emergency meeting, Mr. Chapman had approached Mr. Heckrotte about the investment. And Mr. Heckrotte recalls he told Mr. Chapman there was "no way this deal could go through. . . . It was very risky."
In November 1992, Mrs. McLean continued to advance the investment plan by persuading Mr. Heckrotte to have the Fire and Police board consider the proposal, and by commissioning a required independent analysis of the plan.
Consultant selected
The city's regular investment analyst, William Brock, said he recommended several consultants expert in alternative investments to Mrs. McLean.
When she wanted to hire Malvern, Pa.-based investor Winston Churchill on her own, Mr. Brock says he reminded her that the pension boards would have to approve the proposed $35,000 contract. Mrs. McLean nevertheless asked Mr. Churchill to start researching the investment immediately while she arranged for payment.
By the time she asked the boards to approve a contract with Churchill Investment Partners Inc. -- at the Dec. 17, 1992, meeting -- she already knew that the Churchill report would be favorable.
She assured members that the analysts "were impressed" by Chapman Co.
Not contacted
At that meeting, she also appears to have misled the trustees about how she chose Mr. Churchill, according to a tape of the proceedings.
Mrs. McLean indicated she had called other companies to set a fair price for the service.
But other analysts proposed by Mr. Brock say they never were contacted by her.
She also said she had called other pension boards for references on Mr. Churchill. "I made a couple of phone calls, as I said earlier, checking out 'Win' Churchill because I didn't know him. The return some people are receiving was just unbelievable," she told the board, according to the tape.
But Mr. Churchill says she never asked for a client list.
He couldn't have supplied one -- he invests mainly for himself and does not handle investments for any other pension fund.
Better deal
Asked whom Mrs. McLean could have called about the returns on his investments, Mr. Churchill suggested: "My son?"
Mr. Churchill, who was known to some trustees because he was then chairman of the Pennsylvania Public School Employees' Retirement System board, insists that his evaluation was not influenced by Mrs. McLean.
And he says his firm negotiated a much better deal for the city than the initial proposal -- for example, increasing the city's share the company by 10 percent to 30 percent.
The details surrounding Mr. Churchill's hiring are important because many board members say that he turned them from skeptics into believers.
"I didn't like the deal before . . .," Mr. Heckrotte said. "But the general tone of that evaluation was that the investment was feasible, the organization was strong. It said [Chapman's] people were there at 6 a.m. working, and there late at night."
The trustees voted unanimously to make the investment in January 1993.
Within weeks, however, they began to question Mrs. McLean's actions.
"Why weren't we informed" about the list of consultants, asked Mr. Heckrotte. "If she had six names, why didn't she say to us,
'We should interview these firms'?"
Campaign contributions
Even more troubling, Mr. Heckrotte said, was his discovery that Mr. Chapman and his company were major contributors to Mrs. McLean's campaign.
At a March 18, 1993, joint meeting of the pension boards, Mr. Heckrotte confronted her, sparking an angry outburst.
"They are not a big campaign contributor!" she insisted, according to a tape of the proceedings.
Mr. Chapman was one of seven members of the finance committee for her 1991 campaign for comptroller. He, his relatives and his employees gave more than $12,000 to her campaign fund, adding up to one of her biggest blocks of contributions.
Many investment companies that make proposals to the pension boards contribute to politicians' campaigns, and until Mr. Heckrotte did so, no one on the board had raised a question about donors.
Bothered by denial
But some trustees say they are now bothered by the relationship, and by Mrs. McLean's denial.
Trustee Pauline C. Dietrich says Mrs. McLean should have informed the board about Mr. Chapman's donations and should have excused herself from consideration of the proposal.
If Ms. Dietrich had known about those donations last year, she might not have supported the proposal, she says.
"It happens all the time," Ms. Dietrich said of political contributors coming before the boards with investment proposals. "But that doesn't mean it is the right thing."
Now, she says, "I would vote against [the plan]. And I don't think I am the only one."
Adding to the trustees' concerns, Ms. Dietrich says, are fears that the investment isn't as safe as Mr. Churchill indicated.
Scathing opinion
In March 1993, as the Board of Estimates considered the proposal, the city commissioned two law firms to help evaluate it.
One, Shapiro & Olander, whose principal, Ron Shapiro, was Mr. Schmoke's campaign treasurer, returned a scathing opinion. "It would never be prudent for the trustees to make a substantial direct investment in a securities broker-dealer," the firm warned.
Many of Mr. Chapman's supporters discounted the Shapiro opinion as politically motivated. And Mr. Schmoke appeared to ignore the advice. He moved approval of the plan before the Board of Estimates with a condition -- that the pension board adopt guidelines for alternative investments, and that the Chapman proposal meet those guidelines.
But the law firm's opinion gave some trustees, such as Frank Coakley, new doubts. "It has made me stop and ponder," he said.
Proposal 'not prudent'
The concerns about risk have been echoed by an independent " analyst asked by The Sun to evaluate the Chapman proposal.
Using the information available to the public, the analyst said the proposal was appropriate only for someone willing to take a significant risk. (Mr. Churchill had access to private financial information about Chapman; the city denied The Sun's request for that information.)
The proposal "is not prudent for a pension fund" that is supposed to guarantee payments to retirees, said Perrin H. Long, who analyzes large, publicly held stock brokerage companies for First of Michigan Corp.
He noted that the city would provide most of Chapman Co.'s capital -- the company reported having only $1.2 million of its own capital in 1992 -- but would receive only 30 percent of the nonvoting stock. The city agreed to that so that the Chapman Co. could preserve its status as a minority-controlled firm.
Now, says City Solicitor Neal M. Janey, the plan awaits rulings from securities regulators that the city's stake won't make it liable if the Chapman Co. is found to have done something wrong.
Outcome in doubt
If all the legal questions are resolved, he said, the deal must go before the pension boards and the Board of Estimates for final approval. Even Mr. Chapman's supporters say the outcome is in doubt.
But Mr. Chapman says the plan is close to settlement.
Neither he nor Mrs. McLean told the other trustees about his role as a fund-raiser, Mr. Chapman says, because he assumed "it was common knowledge." Besides, he says, no one ever asks other money managers to reveal their political donations.
The retirement system's investment, he says, would give him the funding to help other minority businesses raise capital by selling their stock. And increasing his company's capital would also, for example, enable it to get a better return under minority set-aside programs for municipal bonds, he says.
The Churchill report should assure the retirees that their investment will be safe and profitable, Mr. Chapman says.
He says he is convinced that the Churchill report is independent because neither he nor Mrs. McLean had met Mr. Churchill before the fall of 1992.
The only thing slowing the proposal, he says, is racist opposition to black economic development.
"Every day we fight elements that are racist and would like to see us disappear," he said. "We succeed against them."