The Chapman Co., which last year assured city officials it would be a safe place to invest up to $10 million in pension money, lurched on a wild financial ride in 1993 -- from heady expansion to layoffs and losses.

By year-end, the local brokerage company, which had promised the city double-digit annual returns, had lost $438,000. Most of the desks in the company's new, marble-decorated office atop the World Trade Center -- labeled by employees the "Taj MaChapman" -- were empty. And the company's capital had fallen drastically, threatening its authority to trade stocks, according to a filing with the Securities and Exchange Commission.

That volatility, say nearly a dozen current and former employees, raises questions about the city's proposed investment in a small, privately held company with a spotty record of profits.

Even some supporters of company President Nathan A. Chapman Jr., including Chapman Co. investor Samuel Hopkins, concede that the deal could be in conflict with laws requiring pension funds to make only "prudent" investments. While Mr. Hopkins favors the deal, he says it can only be justified if the city looks beyond the financial return and considers benefits such as strengthening minority-owned companies.

The company's financial problems have surprised top city officials, who were unanimous in supporting the deal last year. Many officials, including Mayor Kurt L. Schmoke and Council President Mary Pat Clarke, are now counting on another look at the proposal to help them determine its fate.

"The entire proposal must be reviewed again by the [pension] trustees," Mr. Schmoke said. "The strength of the business and the judgment of Mr. Chapman are matters that the trustees will have to look into."

Mr. Chapman says that his company bounced back to profitability this year and that the city's investment is still justified. "In many ways, the company is much better off" -- having proved its resilience -- than it was when the city first considered the investment, he said.

He blames his company's losses on the city's failure to release the $10 million after the deal won unanimous -- but conditional -- approval in March 1993. Last year's ambitious expansion was designed to take advantage of the money, Mr. Chapman said, adding, "I thought it was a done deal."

Described by acquaintances as a master salesman, Mr. Chapman is glib, forceful, hard-working and always optimistic.

In fall 1992, as he prepared to ask the city pension board to invest in his company, he had reason to be buoyant.

His shrewd idea -- creating a brokerage company that specializes in serving minority businesses and investors -- appeared to be turning into gold. He had fought through the investment industry's old-boy network to create a growing and, finally, profitable company.

A 'Great salesman'

Even those who might have reason to be critical of him praise his accomplishments. John B. Slaughter II, a Wheat First Securities broker who was fired from his Chapman Co. job in 1989, says Mr. Chapman "is a great salesman and had a great idea."

But the seeds of the company's expansion and near-disaster were planted at the same time: when Mr. Chapman proposed the multimillion-dollar investment by the city pension board.

Those familiar with Chapman Co. finances, including employees and stockholders, such as Mr. Hopkins, say the company lost hundreds of thousands of dollars last year because Mr. Chapman had convinced himself the city would provide the money long before he persuaded the city.

Most of the current and former employees who agreed to be interviewed did so only on condition that they not be identified, because they were concerned about jeopardizing their jobs with Chapman Co. or with new employers.

A Concerned about safety

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.

City trustees -- who handle about $2 billion in pension funds -- are so concerned about safety that they require those managers to invest only in companies with "long and prosperous reputations" and to hold no more than 1 percent of any company's shares.

So Mr. Chapman had a tough selling job in asking the city to make a large investment in a company with a relatively short -- and not very prosperous -- history.

Helping Mr. Chapman's cause was a new ally on the pension board. The chairmanship had recently been taken over by Baltimore Comptroller Jacqueline F. McLean.

Mrs. McLean had won election to the third-highest position in city government in 1991 on a platform of encouraging minority businesses like Chapman Co. And she had strong financial support from black business leaders, including Mr. Chapman -- one of her biggest fund-raisers -- and his employees and friends.

Despite the uncertain prospects for his deal with the city, Mr. Chapman immediately started acting as though the money was in his pocket.

Just a few weeks after his first presentation to pension trustees -- months before any vote -- he was expanding his staff and promising the new hires that the company would soon be booming, fueled by millions in new capital. Employees hired at that time say he persuaded them to leave good jobs, and even to take pay cuts, to join what would become the "black Merrill Lynch."

Differing opinions

That expansion continued despite hints of opposition on the Board of Estimates, a five-member panel controlled by Mayor Schmoke. All major city contracts are subject to the board's approval.

The agreement that the Board of Estimates voted on called for two $5 million investments, divided equally between debt and equity, in return for 30 percent of Chapman Co.'s nonvoting stock.

The mayor said he favored the deal with Mr. Chapman, who had been campaign treasurer for Mr. Schmoke's opponent, Clarence "Du" Burns, in the 1987 mayoral race. But Mr. Schmoke raised questions about it and refused to vote until he received an opinion on its legality.

Shapiro & Olander, a law firm founded by Mr. Schmoke's campaign treasurer, Ronald Shapiro, returned a withering opinion that called the deal imprudent. However, another law firm retained by the pension board said the deal would be legal. A third law firm, also retained by the city, said it could not make a determination without guidelines for alternative investments.

So on March 31, 1993, Mr. Schmoke took a middle-of-the-road approach.

He and other board members approved the deal, but insisted that the pension board adopt guidelines for alternative investments and that the Chapman Co. deal meet those guidelines.

(The pension board has drafted the guidelines, and the city solicitor is reviewing the deal.)

Employees say that Mr. Chapman was elated when the city endorsed the investment. Believing that the city's conditions were just technicalities, he bought bottles of champagne and set up bank accounts to accept the city's millions.

Expansion pursued

Although delay after delay followed, Mr. Chapman persisted in his expansion and optimism.

Just a few weeks after the city's vote, he hired former NAACP Executive Director Benjamin L. Hooks as a senior vice president. A few months later, he decided to start a new service, over-the-counter trading of stocks, and bought computers and hired traders.

By summer, Mr. Chapman said, he had nearly doubled his staff, to about 50 employees. Some new staff members, believing that the city money would appear soon, were making pitches to participate in deals that would be impossible without the promised capital.

And the company looked extremely profitable. By mid-1993, Mr. Chapman said, the company had a profit of at least $500,000.

In October, Mr. Chapman kept spending -- even though six months had elapsed since the Board of Estimates endorsed the $10 million deal and final city approval was still not in sight. He moved into elegantly appointed offices on the top floor -- above the observation deck -- of the Inner Harbor's World Trade Center.

The office was more than twice as big as his staff needed. And it meant doubling the company's rent to $185,000 a year. Still, Mr. Chapman signed a seven-year lease on the entire floor.

Trading losses

In November, as interest rates began to rise, Dewey Fitzpatrick, a Chapman Co. bond trader in Dallas, bought some bonds on the company's behalf, based on his belief that rates would soon fall again, according to Mr. Fitzpatrick and others within the company.

He was wrong. Interest rates headed steadily up, and the price of those bonds fell.

Neither Mr. Fitzpatrick, who left the company in December, nor Mr. Chapman would give details of the loss. But William R. Amos, an accountant who is an informal adviser to Mr. Chapman, said he was told by company officials that the company had lost about $200,000 on the bond trading.

Mr. Chapman insists that the trading losses were not critical to last year's financial difficulties. The company's problems, he said, began as it became apparent that the city would not forward the $10 million in 1993.

Comptroller's problems

By December, a storm of controversy had hit City Hall's biggest backer of the Chapman deal: Mrs. McLean.

The comptroller went on a leave of absence while Maryland's prosecutor looked into allegations of misconduct and theft. Mrs. McLean was indicted a few months later, charged with hiring a fictitious employee and trying to steer a $1-million city lease to a family-owned building.

The comptroller, who was recently hospitalized after a suicide attempt, has pleaded innocent. Her next court hearing is May 10, and her trial is scheduled to begin June 8.

Mr. Chapman says Mrs. McLean's legal problems were unrelated to his realization that the city might not deliver its money any time soon.

But current and former employees say there were discussions about Mrs. McLean and the company's fate. "She was the one who proposed the investment. Her falling out of grace had to have some impact," says a current employee.

As Mr. Chapman realized that the investment was in danger, he was forced to undo much of his expansion.

He shut down his over-the-counter trading desk and laid off the traders -- writing off about $175,000 in expenses, he said.

Employees say he asked many of them to accept pay cuts. Some refused and quit. Others were later laid off.

In all, current and former employees say, more than 20 people have left the company in the past six months. Mr. Chapman says he still has 40 employees. But those familiar with the company's finances say fewer than 30 employees remain.

In a recent visit to his offices,it was clear that most of the desks were bare.

By the end of 1993 -- a year when the bull market brought big profits to most brokerage firms -- Chapman Co. was in the red.

The company, which had had a $500,000 profit at midyear, showed a $438,000 loss in December, according to an SEC filing. And of the $1 million that private investors had kicked in over the company's seven-year history, only about $103,000 in stockholders' equity remained, the filing says.

Moreover, the company was in violation of securities rules which require companies to keep a cushion of capital to protect investors and customers from losses. Stock brokerages must stop trading as soon as they realize they've fallen below the minimum capital level. According to a report filed March 15 with the SEC, Chapman Co. had dropped $283,000 below its minimum of $50,000 required to keep trading by Dec. 31, 1993.

But Mr. Chapman says he didn't have to stop trading, because he cured the problem quickly. He contributed cash and asked top company executives to chip in "immediately . . . That day," he said. In all, he said, he raised $365,000.

He declined to specify when he discovered the problem and when he raised the money needed to keep operating. The SEC filings say only that there was a deficiency as of Dec. 31 and that it was corrected in January.

Neither the SEC nor the National Association of Securities Dealers, which regulate brokerage companies, would comment.

Today, Chapman Co. is under fire from current and former employees as well as some investors.

Although he still likes and supports Mr. Chapman, Mr. Hopkins regrets the decision to spend freely in advance of the city investment. "I wouldn't have done it," he said.

Mr. Hopkins, a retired Alex. Brown & Sons partner, warns that the city's proposed investment cannot be justified on strictly financial grounds. Future investors should be "somebody who would do it for other reasons," such as creating jobs in the city, he said.

Others are more critical. William L. Adams, a local real estate developer, says he wants to withdraw his original $30,000 investment in Chapman Co.

"I haven't been satisfied with the company," he said. "I just don't have anything positive to say. I'm sitting on the side. My personal opinion is he is not going to get the city deal."

Still an optimist

But Mr. Chapman insists his company is better off today than it was last year at this time, when the city endorsed the investment.

The company was highly profitable in the first two months of 1994, he says. It has built its capital level back to more than $200,000 through the capital infusion and profits and has shown its resilience by surviving 1993, he says.

"The same basic reasons for making the investment still exist," he insists, adding that criticisms of his 1993 expansion are unfair.

"You can armchair-quarterback and say we can't afford to be here," he said, referring to his company's offices. "But come back and look at us at Dec. 31, 1994, and examine where we stand."

Much of the criticism comes from employees he had to lay off, he said. "There is a lot of bitterness on the part of people who were let go. I've heard some outrageous lies."

And even though he had to write off some ventures last year, Mr. Chapman remains at heart an optimist. He still believes the city will invest in his company, and if that doesn't happen, he adds, his life and business will go on.

"There is no shortage of people who want to be investors."