If any Philadelphia investor deserved to survive the market panic of late 2008, it might have been municipal-bond picker David W. Baldt.
He didn't trust the ratings from Standard & Poor's or Moody's Investors Service, or the interest-rate astrologers so many bond buyers rely on.
Instead, Baldt studied bill-payment rates at little Texas public utilities, tax reassessments in upstate Pennsylvania school districts, and retail sales in Alabama counties with newly built Wal-Marts.
Baldt's team was "able to consistently outperform the market," John Lane, then the chief fund-picker at the Pennsylvania Public School Employees' Retirement System, told me in 1998. While "90 percent of bond managers try to guess" where rates were headed, Baldt dug up the high-yield-but-low-risk issues most likely to juice client returns.
From his first job at the old Delaware Trust Co. in Wilmington, Baldt went on to lead bond teams at Morgan Grenfell, at Deutsche Bank AG, and, starting in 2003, for Schroders P.L.C., the $150-billion-asset British investment firm.
The group's fee was 80 cents per $100 of clients' assets each year, more than most bond managers charge. But it also delivered higher profits, more often than not.
Baldt's main fund fell short of its benchmark bond index in 2007, for the first time since he joined Schroders. But his team was still handling more than $3 billion of other people's money, from his office facing Independence Hall, when Lehman Bros. Holdings Inc. failed on Sept. 15, 2008, and investors stopped buying.
In that supreme test, shareholders cashed out, Schroders closed the two mutual funds Baldt managed, and he quietly left the firm.
But it wasn't the market that ended his career there.
On May 11, the Securities and Exchange Commission office in New York issued an 11-page "administrative proceeding" that accused Baldt of violating antifraud provisions in the federal securities laws.
The SEC says Baldt acted on inside information to warn his children, who work in the securities industry, and other family members to sell their shares. The family members had invested their "life savings" of more than $3 million in the funds he ran for Schroders.
Lehman failed on a Friday. Amid Monday's panicked markets, Baldt's daughter called him to ask what to do with her shares.
Sell them, and buy U.S. Treasuries, if it's "preventing her from sleeping," Baldt told her, according to the SEC.
Some of his clients had the same idea. They were redeeming Baldt's bond funds, $1 million, $12 million, $30 million at a time, in the mass investment sell-off.
Next, Schroders' bosses told Baldt to sell more bonds and raise extra cash, so they'd be ready to pay back more investors as they dumped his funds. Baldt balked: Buyers had disappeared, and he'd be forced to sell those carefully chosen bonds to "vultures," and cheaply. That would cause "massive declines" in share value.
Schroders insisted. So Baldt sold. And on Oct. 2, what he had feared happened, according to the SEC: a bond broker "inquired whether Schroders was in trouble." More investors rushed to cash out.
The next day, Baldt talked to his daughter again. He encouraged her "inclination to sell" and to "go the full route." And to tell other family members, including his ex-wife. They sold $200,000 of the shares in the next two trading days.
Schroders was watching. The firm's regulatory-compliance department, scrutinizing the list of buyers, realized Baldt's family was dumping his funds. Had he warned them? The firm refused to redeem more of their shares.
Schroders "has no tolerance for the activities alleged in the SEC's administrative action against David Baldt," spokeswoman Jennifer Williams told me. Schroders "itself detected Mr. Baldt's actions and promptly launched an internal investigation. At the conclusion of its investigation, [Schroders] determined that Mr. Baldt had violated its code of ethics and compliance policies, removed Mr. Baldt immediately from portfolio-management responsibilities, and reported Mr. Baldt's activities" to the SEC.
Baldt resigned a month later, the firm says.
By then, Schroders had frozen the two mutual funds Baldt ran and begun an "orderly liquidation." Investors in the larger, intermediate-term fund were paid $8.85 a share, down from $9.54 the day before Lehman crashed. The smaller, short-term bond fund price fell to $8.38, from $9.42.
Those are big drops for bond funds, but was easing that loss worth Baldt risking a 37-year career?
The team Baldt headed still works in Philadelphia, managing more than $2 billion in bond portfolios for individuals and institutions.
Baldt says he's looking forward to a hearing on the SEC claims. "For eighteen months I have had to remain silent in the face of false accusations," he told me in an e-mail. "At long last there will be a forum for me to disclose the true story." He plans to explain "the actions of Schroders' senior executives who are now taking credit for precipitating this case against me."
He promised to "identify the true misconduct and breach of fiduciary duty that took place and identify who committed it."
Baldt is representing himself in the hearing, having discharged the securities defense team at Stradley, Ronon, Stevens & Young L.L.P. after "their billing crossed a threshold that I could no longer pay."
"Dave has a great reputation, [but] in a process like this anyone would be well-served by bringing an attorney familiar with those issues," says Howard A. Trauger, president of Schuylkill Capital Management and a past president of the Philadelphia Bond Club.
Why didn't the SEC also go after his family members, both in the investment business, who sold their shares?
The agency would likely have to show that Baldt didn't just tell them what to do, but also why, using information that wasn't available to the public.
"It's difficult to prove intent," says Amy Greer, co-head of the securities-litigation practice at Reed Smith L.L.P., and a former head trial counsel in the Philadelphia office of the SEC.
Highlights from the text of the administrative proceeding filed by the SEC. D3.