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2 Banks Pay $515M in Mutual Fund Scandal

Mar 16, 2004 | AP

Two large financial institutions are committed to paying $515 million to resolve allegations of improper mutual fund trading in a deal to settle the biggest fund scandal yet, authorities said.

Under terms of a tentative settlement that must still be accepted by the Securities and Exchange Commission, Bank of America and FleetBoston Financial also agreed to cut fees investors pay by $160 million, it was revealed Monday.

Eight members of the board of directors of Nations Funds, Bank of America's group of mutual funds, will have to relinquish their positions within a year for their alleged role in allowing the trading violations. It's the first sanction of its kind in what has become an industrywide investigation.

"These directors clearly failed to protect the interest of investors," said New York Attorney General Eliot Spitzer, who brought the first charges last September in the controversy that has rapidly enveloped the $7 trillion fund industry. "They acknowledged the problem of market timing, but then allowed a favored client to engage in that harmful practice. The departure of these board members should sound an alarm for all those who serve in similar capacities."

The proposed settlement requires Bank of America to pay $125 million in civil fines and $250 million in restitution to investors. FleetBoston would have to pay $70 million in civil fines and an additional $70 million in restitution.

In addition, the two financial titans which plan to merge agreed to make certain changes in their mutual fund operations, including the board overhaul. By year's end, Bank of America will have to be completely out of the securities clearing business, that of executing transactions for other parties.

"The $375 million that Bank of America has agreed to pay and the significant reforms that it has agreed to implement reflect the seriousness of the misconduct in this matter," said SEC Enforcement Director Stephen Cutler. "We will continue to investigate that misconduct in an effort to hold all responsible parties accountable."

The $160 million reduction in fees, or $80 million for each company over a five-year period, was separately negotiated by Spitzer. As their investigations of the fund industry have widened, the SEC has rejected Spitzer's view that excessive fees charged by fund companies should be cut as part of legal settlements.

Bank of America's fund trading came under scrutiny last September, when Canary Capital Management LLC agreed to pay $40 million to settle charges it engaged in improper short-term trading and illegal aftermarket trading with several mutual fund families, including Bank of America though the bank was not charged at the time.

Last month, the SEC and Spitzer alleged in a civil lawsuit that FleetBoston's two mutual fund subsidiaries engaged in massive trading abuses over a five-year period that harmed ordinary investors. In the suit filed in federal court in Boston, where Fleet is based, the SEC and Spitzer alleged that Fleet's Columbia Management Advisors Inc. and Columbia Funds Distributor Inc. allowed the short-term trading — also known as market timing — by favored big-money investors at the expense of more traditional, long-term investors.

The two subsidiaries allegedly carried out the scheme over five years, up until 2003, while publicly saying that they prohibited such trading.

The settlement reflects Bank of America's "good-faith effort to resolve this matter and is in the best interests of our customers, associates and shareholders," said Kenneth D. Lewis, chairman and chief executive officer of the Charlotte, N.C.-based company. "We have consistently said that the actions of a few individuals and what occurred is not representative of the way Bank of America does business, and we have no tolerance for actions that violate our values."

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