THE TWO EMPIRES OF MAX CHAPMAN
In many ways, Max C. Chapman Jr. is Nomura Securities Co.'s dream executive. He was a respected Wall Street insider who had been president of Kidder, Peabody & Co. When Nomura, the world's largest brokerage, hired him in 1989 to become the first American to run a Japanese firm's U.S. operations, its executives saw Chapman as a key to unlock the U.S. financial markets. Nomura Securities International (NSI), Nomura's U.S. subsidiary, had been in New York for 39 years without earning a profit.
Today, Chapman is in the fourth year of a five-year employment contract and is angling for a promotion. "At some point, Nomura will say to me, 'We would like you to do something more,'" he says. "Or I'll decide to do something else."
Chapman, 50, can make a strong case for himself. He has gone a long way toward making NSI into an American company. He has weaned it away from dependence on Japanese clients and says it now does more than 90% of its business with U.S. customers. NSI's capital has swelled from $377 million to $840 million, its assets are now $40 billion, and it has 850 employees. Best of all, the firm earned $40 million from April to September, 1993, and is on track to earn over $100 million through March, 1994, says Chapman. "We were a pygmy in America four years ago. Now, we're a good, solid, medium-sized firm," he says.
Clouding Chapman's successes, though, is considerable controversy within Nomura about what is known internally as Max Inc., two unpublicized ventures established by Chapman and run independently of Nomura for his own benefit. Chapman's main entity is Moran Group, an investment firm formed in October, 1992. Another entity is CCM Capital, which does leveraged-buyout deals.
Several securities experts see the possibility of a conflict between these outside ventures and Chapman's obligations to Nomura. Says Roy C. Smith, professor of finance at New York University's Stern School of Business and a Wall Street veteran: "This creates a division of a guy's time between his employees and his [own] principal activities. How can you expect him to give his last dollar and his last 10 minutes when he might rather put it into his own trading activities?" He adds that while Japanese firms are often willing to give broad license to attract senior U.S. executives, "this is a special arrangement that wouldn't be tolerated at a major U.S. firm because of potential conflicts."
UNHAPPY. Junichi Ujiie, co-chairman of NSI with Chapman, backs Chapman. "Compared to the success he, and we together with him, brought to this company, I really don't think this [arrangement] is overly sweet to him." Still, sources close to Nomura say his Japanese bosses have been uneasy with Chapman's outside activities and have been trying to exert some control over them. But not until Oct. 1 of this year was Nomura able to get Chapman to agree to formal oversight of his personal trading activities.
Chapman was visibly unhappy when BUSINESS WEEK asked him questions about his private business dealings, whose details the magazine uncovered from documents and extensive interviews with Wall Street executives, traders, former Nomura employees, and sources close to the firm. Chapman denies any conflicts. He admits that having businesses on the side is unusual on Wall Street but adds that "just because it's unusual, doesn't mean it's wrong." Chapman says, and Nomura has confirmed, that all of his business activities were disclosed and approved by Nomura before he began them and that under the October agreement, every trade he does is reviewed and cleared by Nomura. "If the firm does well and I've benefited, that's what the deal is all about," says Chapman. "Nomura is not uncomfortable. They know what's going on." And he says his priorities are clear: "My own personal business has taken second fiddle to the firm's business."
Chapman's ownership of Moran Group has stirred up most of the debate within Nomura. According to filings with the Delaware Secretary of State, Moran is a limited partnership run by a general partner, Gardner Capital Management Corp. who is none other than Chapman. Moran's offices, as well as CCM Capital's, are in the same building in the World Financial Center as NSI's offices. Chapman says he spends very little time on his personal business and "very seldom" visits Moran's offices, except occasionally to "have a sandwich with the guys at lunch."
Chapman confirms that Moran manages money, but he won't comment on its clients. Knowledgeable sources close to Nomura say that Moran's money comes from one exclusive client, Ross Capital. According to several Wall Street trading sources, Ross is part of a group of mostly Bermuda-based companies run by Wolfgang Flottl, a secretive Austrian banker and big-league trader. Arthur Liman, Flottl's attorney, declined comment.
Sources close to Nomura maintain that in some cases, Chapman gets preferential treatment from Nomura for his Moran trades. They allege that although the firm doesn't lose money on the transactions, Chapman sometimes gets better pricing and better financing rates than Nomura's best customers.
At times, assert these sources, Chapman has personally walked down on the trading floor and executed trades for Moran. To illustrate how it works, they say Chapman will go to a bond trader and ask the trader to tell him how much it would cost to buy 500 long bonds. The bond trader, the sources say, might quote Chapman a favorable price, since Chapman ultimately controls that trader's bonus. Although a customer normally would finance a transaction at the London Interbank Offered Rate plus 3 percentage points, Chapman might get a rate of LIBOR plus 2 points.
GOOD CUSTOMER. Chapman denies that he has ever received preferential treatment or that he pulls rank at Nomura to get a good deal. "I conduct myself honestly. My first responsibility is to manage Nomura. I've never argued about a commission." He says he did execute trades for Moran in the "first month or so" after it was formed but since has stopped. "When I first started, I would say, 'Go buy some futures.' We decided it was not a good idea. I stopped doing that. Procedures were put in place." According to Chapman, the October agreement "says I will not interface with the salesmen," that trading will be "done on a fully disclosed basis," and that "Nomura has the right to cancel the trade."
Chapman argues that Moran generates commissions for NSI because it is a good customer. Under the October agreement, Chapman pays Nomura an advisory and administrative fee for access to Nomura's ideas and research and its monitoring of Moran's trading.
Peter Chepucavage, NSI's general counsel, says permission to establish Moran was added to Chapman's contract when Moran was organized. "We decided to approve it because it did not interfere with his responsibility as co-chairman of NSI," says Ujiie. Before the October agreement, says Chepucavage, he was "personally responsible for looking at [Chapman's] trades." Chepucavage says the agreement set up a committee of four NSI executives to oversee Chapman's trading. "He trades a lot, and I was busy, and it's fair to say I wanted some help," he says. The committee is made up of managers who report to Chapman, which experts say is not an ideal situation. Says Harvey J. Goldschmid, law professor at Columbia University law school: "In general, we would want disinterested directors passing on any transactions of that CEO, or senior executives above the CEO, not below."
INTIMIDATING. CCM Capital, Chapman's LBO firm, was set up in December, 1992, and is run by T. Guy Minetti, former head of Kidder's high-yield department, according to Private Equity Analyst, a Wellesley (Mass.) newsletter. Chapman has given CCM up to $25 million to invest and pays CCM a management fee on that amount to cover overhead for the three-man operation, Chapman says. So far, CCM has bought two small companies for a total of $3 million in equity. "He set Guy up with money. Max makes all the decisions," says a former colleague. Chapman says he has a clause in his original contract with Nomura that allowed him to start a merchant-banking fund. He says his only role at CCM is to provide capital.
Despite all the controversy, Chapman has done well building NSI's businesses. As a manager, he is both charming and intimidating, with a bull-in-a-china-shop style that doesn't always please his Japanese bosses. "Max is relentless in pursuit of success," says John E. Toffolon Jr., NSI's chief financial officer.
His hard-driving style at NSI may derive in part from lingering disappointment that he didn't get the top job at Kidder. A slow learner until high school because of dyslexia, Chapman says he ultimately graduated with straight As. He went to the University of North Carolina on a football scholarship and then joined the Marines. "My wife says I spend my life proving myself to people." He is not modest about his wealth. With his new Gulfstream-3 jet, a sprawling ranch in Wyoming, and property in Virginia, he likes to brag, "I don't have to work to earn a living."
Instead of competing head-on with the big Wall Street firms for customers, when he joined Nomura Chapman targeted a few niche areas where Nomura's abundant capital might have an advantage. He hired Wall Street veterans and former lieutenants from Kidder, such as Joseph R. Schmuckler, to start a proprietary trading operation, which is being expanded to customer businesses. Nomura also has a successful real estate financing business headed by Michael A. Berman, formerly at Kidder, an equity division under James G. W. Reed from Baring Securities, and a junk-bond effort headed by Lawrence J. Pomerantz, an ex-Drexel banker.
Nomura still is not a major player in Wall Street's main businesses of investment banking, mergers and acquisitions, or institutional stocks and bonds. "We're about to show up on the radar screen" in equity and debt, says Robert D. Long, who joined NSI from First Boston Corp. to head investment banking. But it has made big inroads in some niches, such as program trading and collateralized mortgage-obligations.
TOUGH SPOT. Right now, all of NSI is on an intense Max watch. With his contract expiring in late 1994, the firm's leadership is up in the air. Rumors are rampant. Some have Chapman running for senator from Wyoming, while others think he may leave and build a larger financial empire. But what Chapman really seems to want is more responsibility at Nomura. In addition to keeping control of Nomura's U.S. operations, he would like to run Nomura's London office, says one Nomura exec.
Nomura is in a tough spot. It's increasing its global presence and is now way ahead of the rest of the Japanese brokerages in adjusting to the global market. Chapman has been difficult to work with, but losing him could set back expansion efforts.
Officially, the Japanese in Tokyo and New York back Chapman. Says Hitoshi Tonomura, executive vice-president of Nomura: "We simply hope that he's going to continue as CEO." Nomura, though, got more than it bargained for when it hired Chapman, and his bosses must decide whether his contributions are worth his controversial dealings.Leah Nathans Spiro in New York and Larry Holyoke in Tokyo, with Sandra D. Atchison in Denver