BALTIMORE (HedgeWorld.com)–Fallout from a controversial referral payment made to the mother of an executive at Mercantile Bankshares Corp. has led the bank to fire the Chicago-based fund of funds adviser it hired based on the mother’s advice.

The bank notified Contego Capital Partners Co., a fund of funds business run by former Agio Alternative Assets LLC employees Arlene Busch and Jon Norberg, that it will no longer serve as the investment adviser to the Mercantile Small Cap Manager Fund LLC, according to a statement from Mercantile Bankshares.

Ms. Busch was traveling and did not return a call seeking comment by press time.

In the statement, bank officials said their agreement with Contego would end May 24. The bank is looking for another manager to oversee the day-to-day investments of the Small Cap Manager Fund.

On March 18, Mercantile Bankshares officials fired John Pileggi, chief executive of investment and wealth management, and Michael Donnell, a senior vice president in the wealth management division, for not disclosing that Mr. Donnell’s mother received a “nearly six-figure” payment for recommending what was then Agio Alternative Assets to serve as the investment adviser for the Small Cap Manager Fund (see Previous HedgeWorld Story).

In announcing the firings, Edward J. “Ned” Kelly, chairman, president and chief executive of Mercantile Bankshares, said the payment, made by what was then Agio and approved by Mr. Pileggi but never disclosed to bank officials, represented a conflict of interest.

“Potential conflicts of interest, no matter how they arise and whether they are direct or indirect, must be thoroughly analyzed and fully disclosed,” Mr. Kelly said.

Mr. Donnell’s attorney, James P. Ulwick of the Baltimore law firm Kramon & Graham PA, told the Baltimore Sun newspaper that his client had disclosed the payment to his superiors and to the bank’s legal department.

In a statement, Mercantile Bankshares officials said the decision to fire Contego was based on payment of the referral fee to “a member of the immediate family of a senior employee” at Mercantile Bankshares.

CClair@HedgeWorld.com