The overseers of Maryland's pension system acknowledged yesterday that they had received warnings for years about how banker Nathan A. Chapman Jr. was investing state retirement money but ignored the signs or failed to notice them.
In a legislative hearing in Annapolis, some pension officials testified that they were unaware for several months that a New York money manager employed by Chapman had been indicted by a grand jury in December 1999, even though the news had been reported prominently in the Wall Street Journal and other publications.
Others said they learned in April 2000 that the FBI was investigating Chapman but continued to trust him to invest about $175 million in state funds -- until he was fired almost two years later.
Chapman, a politically connected investment banker, is under investigation by a federal grand jury and the Securities and Exchange Commission for the way he handled his pension fund business. Investigators are scrutinizing how Chapman used state retirement money to buy stock in his own company, a controversial practice that resulted in losses of $5.3 million.
But the pension fund trustees and staff members who were responsible for employing Chapman told lawmakers that they were either in the dark about the problems or overlooked hints that something was amiss. They made no apologies for their stewardship of the state's $26 billion retirement fund, instead putting the blame on Chapman.
"We placed our trust and confidence in a manager" who failed to do his job, said Peter Vaughn, executive director of Maryland's State Retirement Agency, which serves about 250,000 retired teachers, police officers and other state employees. "We have been harmed. Our reputations have been bruised."
Lawmakers expressed frustration at the pension officials' testimony, which was marked by memory lapses and finger-pointing. Some witnesses sidestepped numerous questions, citing the advice of lawyers who told them to keep quiet.
Legislators said they could not understand why pension officials did not act sooner to terminate Chapman's contract. They said the first clear warning sign came in December 1999, when news broke of the indictment of New York money manager Alan Bond, who was employed by Chapman to invest a chunk of the state's portfolio. Bond has since been convicted of fraud and is awaiting trial on additional charges.
"You guys are the boss," said Sen. Edward J. Kasemeyer (D-Baltimore County), chairman of the General Assembly's Joint Committee on Pensions. "Why didn't you act? . . . It's beyond my comprehension that if a person got indicted and is managing your money, that you didn't discuss, 'Hey, what should we do with this person?' "
Added Sen. Donald F. Munson (R-Washington): "The fact that Bond was indicted had to leave people aghast. I can't believe people weren't horrified by that."
Several pension board trustees said they did not realize Bond had been indicted, and they blamed staff members for not telling them. "That wasn't brought to our attention," said Trustee Arthur N. Caple Jr.
Carol Boykin, the chief investment officer, said she discussed it with then-state Treasurer Richard N. Dixon (D), the pension board's chairman at the time, but could not remember what happened after that or why officials did not pursue the issue.
Boykin testified that she asked Chapman about Bond's indictment but that he told her not to worry. "He felt the issue was trumped up," she said.
A few months after Bond was charged, pension officials got wind that investigators were also scrutinizing Chapman but again let the matter drop.
Three pension trustees said Dixon told them in a closed meeting in April 2000 that the FBI had recently interviewed him about Chapman's dealings with the pension fund. But they said Dixon would not divulge details about the FBI's interest in Chapman, so they continued to let him invest the state's retirement money.
"The chairman said, 'Well, you should know I've been questioned by the FBI,' and I think he even said something about allegations of criminal behavior," said pension Trustee Carl D. Lancaster. "We asked him for more information, but he said he couldn't tell us."
Dixon, who is now retired, confirmed in a telephone interview that he had been interviewed by the FBI in 2000 but declined to give details. "They were doing an exploratory-type investigation," he said. "But I refused to talk about it then, and I'm not going to talk about it now."
Chapman, who did not appear before the committee, is the former chairman of the University System of Maryland Board of Regents and a close ally of Gov. Parris N. Glendening (D).
He began investing money on behalf of the state pension fund in 1996 under a program designed to encourage minority-owned businesses.
State Comptroller William Donald Schaefer (D), a pension board trustee who has clashed with Glendening, said Chapman's political ties probably enabled him to escape closer scrutiny.
"Let's not kid ourselves," Schaefer testified. "Chapman had a very high profile. Everybody knew Chapman. . . . Because of who he was, I honestly think he was handled a little differently."