A former investment adviser testified Thursday that Nathan A. Chapman Jr. instructed him to use assets from the Maryland state pension fund to buy stock at an artificially high price in a company Chapman was taking public.
Alan B. Bond, who managed pension assets that were under Chapman's control, testified in U.S. District Court here that the price of stock in eChapman.com declined sharply when it began trading in June 2000, falling from $13 a share to $7 in less than two weeks. It was then, Bond said, that Chapman instructed him to buy 175,000 shares -- at the initial price of $13 each.
The transactions resulted in an immediate loss of more than $1 million, most of it from the state pension fund. As the stock continued to decline and Bond put still more pension money into eChapman.com, the pension fund eventually lost nearly $5 million, the government has alleged.
The testimony, which Bond gave under a grant of immunity, came in the fourth week of Chapman's trial on charges of wire fraud, mail fraud, securities fraud and other offenses. Prosecutors allege that Chapman, former chairman of the University System of Maryland Board of Regents, compelled Bond to buy eChapman.com stock with pension funds despite restrictions against such investments.
Defense attorney William R. Martin sought to blunt Bond's account by highlighting Bond's criminal convictions in two unrelated felony financial-crimes cases. Martin also noted a federal judge's finding that Bond perjured himself at a trial in one of the two cases.
But first, on direct examination, Bond spent six hours over two days describing his financial ties with Chapman and Chapman companies, and his increasing reliance on the business he hoped Chapman would deliver.
Chapman controlled more than $100 million in Maryland pension assets. The assets were held in a trust that also included smaller sums from other pension plans. Chapman, through one of his firms, was the trust's primary investment manager.
He hired "sub-advisers" to manage the trust's assets. Among those sub-advisers was Bond, who by 1999 was managing more than $20 million from the trust. Bond has testified that Chapman pressured him to invest the funds in eChapman.com and two companies Chapman had taken public previously.
Bond, who had already agreed to buy 200,000 shares of eChapman.com at the initial public offering, spoke Thursday of his "extreme frustration" when Chapman asked him to buy 130,000 more. Bond testified that the stock, in addition to its artificially inflated price, was not well suited to his firm's investment strategy.
"Nate, this stock is already down," Bond recalled saying. "It's 50 percent. How are we going to buy it at the IPO price of $13 and put it in the portfolio? The amount of stock that we're adding is going to make this not just a large position in the portfolio but clearly the largest position in the portfolio, and it's just going to stand out dramatically."
"Don't worry about that," Chapman responded, according to Bond. "I got you covered on that. There may be some more money available in the near future."
Bond bought the 130,000 shares, and then 45,000 more. The next month, in July 2000, Chapman gave Bond an additional $10 million from the trust to manage, according to Bond and court documents.
Under questioning from Martin, Bond said the possibility that his 121/2-year sentence in the other cases could be reduced was "one component" of his decision to testify against Chapman. Bond pleaded guilty to charges in one case after a jury found him guilty in the other.
Martin also suggested that Bond had drawn a lesson from his first indictment. In that case, Bond and a friend, a broker, were accused of arranging an illegal kickback scheme. The broker, Robert Spruill, cooperated with the government and drew a four-month term. Spruill, Martin said, "beat you into the prosecutor's office" and negotiated a better deal.
"The only one who gets the real deal is the first one in, and Mr. Spruill was the first one in, is that right?" Martin asked.
"That's correct," Bond replied.
In the second case, Bond was convicted of improperly allocating his and his client's trades, putting the profitable transactions in his personal account.