Maryland pension system officials say they were surprised to learn that money manager Nathan A. Chapman Jr. allowed firms he supervised to invest state retirement funds in his own companies. But the evidence was there.
In report after report going back to 1999, Chapman's money management company informed the state retirement agency that his hand-picked "sub-managers" were investing in companies he controlled.
In a failure of oversight, the staff of the agency apparently never scrutinized the reports but filed them away unread. The reports were obtained by The Sun last week under Maryland's public records act.
Experts consulted by The Sun have described the transactions as a clear conflict of interest - a judgment expressed by several pension board trustees when they fired Chapman in January. The board acted after learning that Chapman, who had managed money for the state pension system since 1996, was under investigation by the Securities and Exchange Commission.
The staff's apparent ignorance about earlier trading in Chapman's companies prevented the state pension board from blocking the system's ill-fated investment of more than $5 million in the June 2000 initial public offering of eChapman.com.
Chapman's sub-managers paid $13 a share for the stock - $4 more than it ever fetched on the open market. The pension system wound up owning about a third of the publicly traded shares in Chapman's company - stock now worth just pennies a share.
The $27 billion Maryland pension system, which has lost $6 billion in assets over the past two years, provides retirement benefits for state employees and teachers. Details of the system's Chapman investments were first reported in The Sun in March.
The pension system's lax oversight could become a factor in the current federal grand jury investigation of Chapman's dealings with the state. Chapman, chairman of the state university system's Board of Regents and a friend of Gov. Parris N. Glendening, is pointing to the reports as evidence that pension officials gave tacit approval to the trades in his stock.
"The significance is that it certainly puts the client on notice that the stock is in the portfolio," Chapman said last week. He said that if pension system officials had raised any questions about the propriety of the investment, he would have directed his sub-managers to sell the stock and he would have made up for any losses.
"No one was hiding the ball, nor was there any reason to," he said.
The chairman of the state pension board, Comptroller William Donald Schaefer, did not respond to requests for comment. But a spokesman for the pension system, Joseph M. Coale, said Chapman made no attempt to consult with the board before permitting the investments.
"It was not done in writing. It was not done verbally," Coale said. "He should have known perfectly well it was a conflict of interest."
Chapman's quarterly reports to the pension system did not highlight the investments in his companies, but the holdings were listed in accompanying tables more than a dozen times from 1999 to 2001.
For instance, in a table in the back of the 113-page June 1999 report, Chapman Holdings - a predecessor to eChapman.com - was listed as one of Albriond Capital Management's 10 worst performers. Albriond Capital Management was a money manager selected by Chapman.
In the report for the quarter ending in June 2000, the name of eChapman.com made its first appearance. The company was Albriond's single largest holding.
Looking more carefully at those investments, the pension board has since concluded that Albriond bought 70,000 shares in Chapman Holdings Inc. on behalf of the state for $560,000 in February 1998. In June 2000, Albriond bought $5.1 million worth of stock in Chapman's new company, eChapman.com - bringing the state fund's total investment to $5.7 million.
Another Chapman-selected trader, Zevenbergen Capital, invested $260,000 in state pension funds in eChapman.com at that time - stock it later liquidated at about a 50 percent loss.
Coale said pension system officials trusted Chapman to act as a fiduciary and protect the system's assets by overseeing the managers he was entrusted to hire. "If there's a breakdown here, we're the victim," Coale said.
Chapman agrees that he did not seek the pension board's approval of the investments in advance, but contends that was not necessary. "Conflicts of interest are cured by disclosure, and we have disclosed," he said.
University of Maryland law school Professor Lisa Fairfax disagreed. "If you have a conflict of interest transaction, it either has to be fair or you have to get some prior approval by a disinterested body," she said.
Chapman's written reports to the pension system may force the government to pursue civil rather than criminal action in the case, according to Washington attorney Warren L. Dennis.
"I think it's going to be very hard to prosecute this case," said Dennis, a senior partner with the Washington office of New York-based Proskauer Rose.
Coale defended the staff's performance, saying the three employees who track the fund's stock market investments are too few to examine managers' reports in detail.
"We were not structured to look for it," Coale said. "We were not staffed for that level of detail."
He said the system has introduced reforms to tighten up the staff's scrutiny of money managers. All money managers now must do their trading through a single bank that gives system officials access to their trading records, he said.
Coale said that in a perfect world, someone at the pension agency would have given Chapman's trading more detailed scrutiny. "I wish it looked a little better," he said.
Sun staff writer William Patalon III contributed to this article.