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Posted on Tue, Mar. 16, 2004 FleetBoston Financial Corp., Bank of America to Pay $675 Million Penalty
By Andrew Caffrey, The Boston Globe Knight Ridder/Tribune Business News
Mar. 16 - Bank of America Corp. and FleetBoston Financial Corp. yesterday struck an unusual joint deal with securities regulators that will cost the banks $675 million to settle charges that they had defrauded shareholders by allowing select investors to improperly trade in their mutual funds.
Regulators are also forcing out eight trustees of Bank of America's Nations Funds. The expulsion is the first time regulators have held mutual fund trustees, who are akin to directors of a corporate board, accountable for allowing improper behavior.
Coming on the eve of the two institutions' merger, the timing of the deal was so crucial that attorneys negotiated all weekend to reach a "preliminary" agreement that they could announce yesterday. The banks are scheduled to hold separate shareholder meetings tomorrow for votes on the takeover.
"It was very desirable to have the agreement in place so the shareholders could see it before the final vote," said Bank of America spokesman Robert L. Stickler. Bank of America chief executive Kenneth D. Lewis said in a statement that the two banks "now look forward to focusing our energies on growing our business."
The deal represents the largest penalties regulators have secured so far in the mutual fund industry scandal. The payments are also much greater than what either bank had initially suggested or expected it would pay. Regulators said the payments reflect the fact that the scope of market timing at Fleet's Columbia Funds was significantly more extensive than first thought, while the wrongdoing at Bank of America involved multiple levels of the company and was so egregious as to warrant a stiffer punishment than they had levied in previous cases.
The coordinated settlements of what had been two separate fraud investigations is unprecedented in the market-timing scandal, and was driven by the desire of the two banks to put the issue to rest before the scheduled April 2 closing of Bank of America's acquisition of Fleet. Regulators took the unusual step of disclosing a "preliminary" agreement with both institutions now, rather than wait until a final deal, which will include more detailed information about the cases.
With this agreement, mutual fund firms have now reached settlements totaling $1.65 billion, eclipsing the $1.4 billion Wall Street firms agreed to pay last year to settle charges their analysts issued biased research to win investment banking business, New York Attorney General Eliot Spitzer said.
Under its settlement with the Securities and Exchange Commission and Spitzer, Fleet agreed to pay a total of $140 million. Half will go to restitution for shareholders of the funds that were market-timed, and the other half reflects penalties.
This is far more than the $25 million in restitution that Fleet said several weeks ago that it expected to pay. At the time, Fleet acknowledged it had agreements with investors to market-time its funds, but said most of the trading involved just three investors and three mutual funds.
Market timing is the rapid trading in and out of mutual funds, to take advantage of inefficiencies in the pricing of their underlying securities. While not illegal, most companies prohibit market timing because it can lower fund performance.
In their Feb. 24 lawsuits against Fleet's Columbia operations, the SEC and Spitzer said the firm had agreements with nine investors to market-time 17 funds.
But then Fleet's Columbia operations last week turned over another huge batch of trading records to SEC investigators. The records showed about 3,000 accounts out of 2 million had made more than two round-trip trades -- a purchase and sale in a fund -- in a 90-day period, or more than five round-trips within a year, of amounts greater than $100,000.
Columbia officials didn't have agreements to allow those investors to market-time in those additional cases, said Peter Bresnan, acting director of the SEC Boston office. But he said the company didn't stop the trading, either.
"Fleet hoped to reap increased fees by secretly preferring some customers over others. But instead of profiting it will have to pay stiff penalties for its misconduct," Bresnan said.
"Any activity which disadvantaged customers is offensive, even though limited to a small number of individuals," Fleet chief executive Chad Gifford said in a statement. The agreement "underscores our commitment to have the best practices in the industry to assure our customers' interests are our top priority."
Fleet had suspended at least eight Columbia employees implicated in the timing case, five of whom have since been fired.
Bank of America, meanwhile, will pay $250 million in restitution and surrendered profits from allowing the improper trading. It will also pay another $125 million in penalties for offering New Jersey hedge fund Canary Capital Partners LLC unusual access to market-time and late-trade not only the bank's own mutual funds, but those of other mutual fund companies as well.
Regulators said that Bank of America gave Canary a special electronic link through its securities clearing operation that allowed the hedge fund to disguise its trades in hundreds of mutual funds. It also allowed Canary to rapidly trade in and out of its Nations Funds.
"The conduct was serious and occurred on many levels, and as a result Bank of America is paying a heavy price," said Mark Schonfeld, associate regional director of the SEC's New York office.
Bank of America said $25 million would go to shareholders in its Nations Funds, and the remainder of the restitution would reimburse investors of other mutual funds hurt by the improper trades. Bank of America also agreed to the SEC's request that it quit the security-clearing business, but Fleet has a similar business that will be part of the combined entity.
The eight trustees of Bank of America Nations Funds are being forced out because regulators said they exempted a favored market-timer from short-term fees that the board adopted in 2002 in order to deter such short-term trading. Regulators and Bank of America declined to name the trustees.
The two banks also agreed to Spitzer's demand that they reduce management fees to investors in their mutual funds by a total of $160 million over five years.
TIMELINE
Nov. 13: Fleet confirms it got subpoenas from Spitzer and SEC over "late trading and market timing activity" at its $160 billion Columbia Management Group.
Dec. 8: Banks name a Fleet-dominated team to run the combined $496 billion money management operation.
Jan. 15, 2004: Fleet discloses SEC will recommend enforcement actions over Fleet allowing improper trades from 1998-2003 in three funds.
Feb. 12: Boston Globe reports that Fleet mutual funds allowed over $100 million in market-timing trades by hedge funds and others, mainly in former Liberty Financial funds Fleet bought in November 2001.
Feb. 24: Spitzer and SEC charge Fleet with fraud for allowing $2.5 billion in rapid fund trades over five years. Fleet suspends eight executives, and predicts it will pay $25 million in restitution to long-term investors.
March 10: Bank of America is hit with $10 million SEC fine for stalling on providing documents for a separate investigation of improper trading at its security brokerage.
March 11: Bank of America reported to be facing at least $250 million in penalties.
March 17: Fleet special shareholder meeting will be held in Boston to vote on the Bank of America takeover.
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© 2004, The Boston Globe. Distributed by Knight Ridder/Tribune Business News. BAC, FBF,
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