Banc One Investment Advisors agreed Tuesday to pay $50 million in penalties and restitution and reduce its mutual fund fees by $40 million to settle charges that it permitted improper fund trading.
Under the terms of the settlement with the Securities and Exchange Commission (news – web sites) and New York State Attorney General Eliot Spitzer, BOIA, the investment advisory unit of Bank One (ONE), will pay $10 million in restitution and $40 million in penalties.
In a separate agreement with Spitzer’s office, the company also agreed to cut fees by $40 million over five years.
The settlement also calls for Mark Beeson, former CEO of One Group mutual funds and senior managing director of BOIA, to pay a civil penalty of $100,000. Beeson agreed to a two-year ban from the mutual fund industry and a three-year prohibition on serving as an officer or director of a mutual fund or investment adviser.
Procedures are now in place to protect “mutual fund shareholders and prevent a recurrence of similar issues in the future,” David Kundert, chairman and CEO of BOIA, said in a statement.
Kundert said that the entire $50 million will be placed into an escrow account to be distributed to eligible shareholders through a plan to be created by an independent consultant and approved by the SEC and the independent One Group board of trustees. Payment likely will occur in 2005.
The announcement was made just days before Bank One is scheduled to complete its merger with J.P. Morgan Chase, which would create the No. 2 U.S. bank.
The charges against BOIA came to light in September when Spitzer settled charges with hedge fund Canary Capital Partners that it engaged in mutual fund trading irregularities with Janus Capital and Strong Investments and the mutual fund arms of Bank of America and Bank One.
Bank One is the last of the four fund firms to settle with regulators. According to the allegations, BOIA allowed preferred investors to engage in improper market timing of Bank One funds.
By letting Canary Capital market time its funds and giving the hedge fund information about the funds’ confidential portfolio holdings, “Banc One and Mark Beeson blatantly disregarded the well-being of One Group funds’ long-term shareholders,” Stephen Cutler, director of the SEC’s enforcement division, said in a statement.
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 timers profit at the expense of other investors.
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