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CEO's pledges failed to pan out

Nathan A. Chapman Jr. promised investors in his new online brokerage company that their money would be used to build a business - to create a financial services Web site, advertise for clients and perhaps even start an Internet bank.

Instead, in a futile attempt to artificially prop up the shares of eChapman.com, Chapman squandered most of the millions raised from those investors, according to criminal charges and lawsuits filed against him June 26. He is also accused of making false filings to federal securities regulators to cover his tracks.

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Chapman, a prominent Baltimore investment banker, owned 65 percent of eChapman.com at the time of its initial public offering and was its chief executive officer. Clearly, he had a lot of influence in a situation in which he also had a large financial stake, said James D. Cox, a professor of corporate securities law at Duke University.

"This, to me, really was putting the fox in the henhouse," Cox said.

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Chapman was indicted on charges of looting his company and defrauding the Maryland state employee pension system, for which he managed money. The 39-count indictment, as well as lawsuits by the U.S. Securities and Exchange Commission and the Maryland Securities Commissioner, allege in part that Chapman used money from the initial public offering of eChapman.com to shore up the price of the newly issued stock.

When it was soliciting investors, eChapman.com said it planned to spend $2.85 million constructing a Web site, a central element of its ability to become an online brokerage house. Instead, the firm spent only $725,000, according to the company's SEC filings.

It slashed marketing spending, too. The firm was going to spend $4.75 million to market its new online strategy but spent only $463,000. Also, the company shelved its plans for an Internet-based bank, eradicating the entire proposed expenditure of $200,000, the firm's filings stated.

Chapman pleaded not guilty Thursday, telling a news conference after his arraignment that "had eChapman shares increased in price, like [Chapman company] IPOs did the year before, I would not be standing here today."

eChapman.com was created in about May 1999 to capitalize on the dot-com frenzy, when just about any new Internet-related stock seemed destined for success. It was the third time in 16 months that Chapman was to take a company of his public. However, by the time eChapman was ready to go to market in June 2000, the demand for high-tech and dot-com stock was declining, the Maryland Securities Commissioners lawsuit said.

Big buildup

Chapman had given eChapman.com a huge buildup, positioning it as a brokerage house that would cater to minority investors and an investment bank that would help minority-run businesses get needed capital. He initially sought to sell more than 3.33 million shares at $14 to $16 each, raising as much as $53.3 million.

But the initial public offering, or IPO, was delayed several times and then was reduced in both size and price. In the end, eChapman.com sold 1.26 million shares at $13 each, raising $16.4 million.

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Acting as lead underwriter, Chapman had trouble placing even the 1.26 million shares - a deal he was desperate to complete after having incurred more than $4 million in expenses related to the IPO, court filings alleged. Several investment banks took far fewer shares than they had promised, and other investment banks Chapman had listed as secondary underwriters later said they never agreed to play that role.

According to prosecutors, Chapman and his company's brokers sold hundreds of thousands of shares to the firm's own clients - including some who had no idea the stock was being purchased for their accounts. One broker allegedly placed 308,000 shares of the IPO in customer accounts, financing the shares by selling other client holdings, or even making illegal margin loans.

Even then, other shares were left to be placed.

Since 1996, Chapman had been managing tens of millions of dollars for the $25 billion Maryland state employee pension system, selecting and supervising a group of smaller "sub-managers" who invested the system's money. According to prosecutors, Chapman authorized two of these sub-managers to buy 395,000 shares of eChapman.com using state pension money - though the stock didn't fit the profile of what they were supposed to be buying.

One of those sub-managers, Alan B. Bond of New York, now imprisoned, had lost most of his clients after he was indicted for securities fraud in December 1999. But Chapman continued to employ him, which prosecutors said made Bond "beholden" to Chapman.

Bond used Maryland state pension money to purchase 200,000 eChapman.com shares during the IPO. Authorities allege he then purchased an additional 175,000 shares June 26 - 11 days after the IPO - at $13 per share, though the stock by then could have been purchased for about half that price on the open market.

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eChapman.com never traded at its $13 offering price. It sold for as much as $9.30 the first day but closed at just above $7 per share. It is now worth only pennies per share.

'Market-maker'

Immediately after the stock offering, concerned about the lagging share price and seeking "to avoid financial and personal disaster brought on by the collapse of the IPO," Chapman is accused of using the stock-sale proceeds to buy back most of the just-issued shares - an attempt to "illegally stabilize the price of [eChapman.com] stock and prevent further declines, thereby conducting illegal market manipulation," according to the lawsuit filed by the SEC.

As a "market-maker" in its own stock, eChapman.com was charged with maintaining orderly trading, which meant both buying and selling its own shares. The firm bought shares but sold few, prosecutors said. Indeed, its buy-sell ratio was 300 to 1, meaning it bought 300 shares for each one it sold. At most, the ratio should have been in the mid- to high teens, said Cox, the Duke law professor and securities expert.

The company had filed notice with Nasdaq soon after the IPO that it would be supporting its stock for about three weeks. But Chapman is accused of continuing to wage his support operation for more than four months - even after telling Nasdaq he had withdrawn his "stabilizing bid."

By the time Chapman ended the firm's stock-support operations, prosecutors said, he had spent more than $11 million in a vain attempt to prop up the share price - or nearly all of the $12 million net proceeds the IPO had brought in.


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