Bank of America (BAC) and FleetBoston Financial (FBF) agreed Monday to pay $515 million the largest mutual fund settlement ever to resolve allegations that they cut special deals to allow some investors to market time their funds.
The landmark settlement calls for Bank of America to replace eight directors on the board of its Nations Funds the first action of its kind.
In joint settlements with the Securities and Exchange Commission and New York Attorney General Eliot Spitzer, Bank of America will pay $250 million in restitution and $125 million in fines. FleetBoston will pay $70 million in restitution and $70 million in fines.
As part of the settlement, Bank of America will get out of the securities clearing business by the end of the year. Spitzer’s office also separately negotiated an agreement for the two banks to reduce their mutual fund fees by $160 million over five years.
The settlements were announced together because a merger of Bank of America and FleetBoston is pending. It would create the USA’s second-biggest banking corporation. Shareholders of the banks will meet Wednesday to vote on the merger.
“Any activity which disadvantaged customers is offensive, even though limited to a small number of individuals,” said FleetBoston CEO Chad Gifford.
Bank of America was one of the first firms named in the mutual fund probe. In September, Spitzer settled charges with a hedge fund, Canary Capital Partners, that it engaged in illegal trading practices with the Nations Funds family and three other fund firms.
The bank wasn’t charged with wrongdoing, but one of its former brokers was charged with larceny and securities fraud by Spitzer. “What occurred is not representative of the way the Bank of America does business,” said CEO Kenneth Lewis.
The departure of eight of the Nations Funds board members signals a new chapter in the mutual fund investigation, Spitzer said in an interview.
“These directors clearly failed to protect the interest of investors,” he said. Specifically, the Nations Funds board in May 2002 approved a 2% redemption fee on the sale of its international funds held for less than 90 days, Spitzer’s office said. The purpose was to discourage frequent trading. Yet, the board exempted a hedge fund from the fee and allowed it to continue to market time the funds.
Market timing involves frequent trading to exploit “stale” prices, typically due to time zone differences. It is legal but might violate a fund’s rules. It lets market timers profit at the expense of long-term investors.