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Improper Fleet Fund Trades Top $100m

Officials: Sales staff OK'd market timing by select investors

Feb 13, 2004 | Boston Globe

A handful of investors were allowed to market-time more than $100 million in several mutual funds owned by FleetBoston Financial Corp., according to officials involved in reviews of Fleet's activities, and regulators are trying to determine whether senior managers at the fund business knew of and blessed improper trading arrangements.

Sales staff for the funds owned by Fleet made oral agreements with the select investors hedge funds that specialized in rapid-fire trading into and out of the funds often with the knowledge or approval of the managers of the targeted funds, according to these officials.

The agreements set parameters on the amount and frequency of trading in the funds, in order to keep the market-timing to amounts that mutual fund officials at the time believed would not harm the funds' operations or performance. But the market timers often traded more than they were allowed to, and on some occasions, Fleet's fund employees moved to stop the trading. But on other occasions the investors were able to keep trading, according to these officials, some of whom said the additional trades weren't detected by Fleet's employees or systems.

The side deals appear to violate Fleet fund policies that prohibit market timing in its funds. Last month the company disclosed that the Securities and Exchange Commission is preparing to charge two of its Columbia funds units for allegedly misleading investors about its market-timing policies and practices.

Fleet spokesman James Mahoney said yesterday, "market timing in Columbia funds was extremely limited, and Columbia was ahead of the curve in instituting reforms, most notably imposing redemption fees of 2 percent on certain funds susceptible to market timing in February 2003."

A spokesman for the SEC declined to comment.

Fleet's Columbia Management Group, with $160 billion under management, is the third Boston mutual fund complex implicated in the industry-wide scandal. Last week, MFS Investment Management agreed to pay a total of $350 million to state and federal regulators, and its two top executives were hit with three-year suspensions, for allowing investors to market-time nearly $2 billion in 11 of its mutual funds. Putnam Investments also has struck a partial settlement with the SEC over charges it failed to stop six money managers from excessive trading.

In Fleet's case, the market-timing arrangements involved more than a half-dozen investors, officials said, and trading was concentrated in several of the Liberty brand funds, which Fleet acquired in November 2001. Previously the funds were owned by Liberty Financial Cos. of Boston, which was majority-owned by Liberty Mutual Group. However, as Fleet has disclosed, the market timing was initiated in 1998, when the funds were still owned by Liberty Financial. Liberty Mutual spokesman John Cusolito said the firm hadn't been contacted by the SEC and would not comment further.

The Liberty funds have been implicated in another case involving former brokers at Prudential Securities' Boston office who have been charged by the SEC and Massachusetts regulators with running a market-timing scheme on behalf of several hedge funds. The brokers, Martin Druffner and Justin F. Ficken, have testified to regulators that Liberty employees advised them how to evade trading blocks the funds placed on their accounts, according to testimony reviewed by the Globe.

In its disclosure last month, Fleet said the "majority" of trades were in just three funds, one international and two domestic-based, and most were done by "three entities." It did not name the entities or the funds involved.

Fleet reserved $50 million in its most recent fourth quarter for legal contingencies, including the mutual fund trading matter, and a separate investigation of its stock-trading specialist unit. Fleet is expected next week to settle charges that the specialist business that handles trades on the floor of the New York Stock Exchange improperly traded ahead of its clients, according to an official involved in the case.

The government's investigation comes as Charlotte-based Bank of America is finalizing its $47 billion purchase of Fleet. Once completed, Bank of America said it would locate the headquarters of the combined "wealth management" business, with total assets of $470 billion, in Boston.

Bank of America was itself implicated in the market-timing scandal first exposed by New York Attorney General Eliot Spitzer in September. Spitzer contended that officials at Bank of America's Nations Fund unit helped New Jersey hedge fund Canary Capital Partners make improper market-timing and illegal late trades in mutual funds.

Though Bank of America hasn't been charged by regulators, more than three Nations Funds executives and employees have left the firm, one of whom, former broker Theodore C. Sihpol III, faces criminal and civil charges from by the SEC and Spitzer. Bank of America's Nations Funds has said it will make restitution and pay back fees associated with the Canary business.


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