Officials Filed Charges Against Ex-BofA Broker. New York and federal officials on Tuesday filed civil and criminal charges against a former Bank of America Corp. broker, the first charges in what they called a widening probe of the $6.9 trillion mutual fund industry.
New York Attorney General Eliot Spitzer, joined at a Manhattan news conference by the Securities and Exchange Commission’s enforcement chief, said the investigation could result in “numerous other charges.”
“It is certainly possible theoretically that individuals as well as entities will be subject to being charged for the behavior that we are uncovering and have uncovered,” Spitzer said during a question-and-answer session carried live on CNBC.
Ted Sihpol, 36, was charged in New York state court with felony larceny and fraud counts. He is accused of helping New Jersey hedge fund Canary Capital Partners make illegal late trades of Bank of America mutual fund shares, according to complaints filed Tuesday.
The SEC also filed a civil enforcement action against Sihpol, accusing him of violating federal securities law. He faces up to 25 years in prison on the criminal charges as well as civil penalties and a ban from the securities industry. Sihpol, who was dismissed by the bank last week, surrendered to New York authorities Tuesday morning and was arraigned later in the day.
Bank of America has not been charged with wrongdoing.
improper trading practices
Earlier this month, Spitzer reached a $40 million settlement with Canary over improper trading practices with four mutual fund families. Of the companies named, he said Charlotte-based Bank of America, the nation’s third-largest bank, had the most extensive trading relationship with the hedge fund. The bank had pursued other business with Canary’s wealthy managing principal, Edward Stern.
According to Spitzer’s complaint, Bank of America employees allowed Canary to trade the bank’s Nations Funds mutual funds after the 4 p.m. market close at that day’s market price, a move considered illegal. Such trades are not afforded to ordinary customers.
The complaint also states that some of the bank’s employees knew that Canary was “timing” the market, which involves going in and out of the funds in short periods of time, a move that can diminish the value of other investors’ holdings.
Bank of America last week said it had dismissed three employees named in Spitzer’s complaint, including mutual fund head Rob Gordon. The highest-ranking employee named in the complaint, asset management chief Richard DeMartini, is still at the company.
Bank of America continues to cooperate with law enforcement and regulatory agencies inquiries, bank spokesman Bob Stickler said Tuesday. He said the bank is paying legal fees for former employees, “subject to the normal provision that if they are subsequently found to have broken the law they have to repay us.”
“We are moving diligently to address any issues within our company in order to maintain the trust of our customers,” he said.
According to Tuesday’s complaint, Sihpol of New Canaan, Conn., started talking with Canary in April 2001 about a trading relationship and enabled Canary to make late trades until this year. He also falsified and destroyed documents Bank of America was required to maintain, according to the SEC complaint.
Sihpol joined the bank after leaving CIBC World Markets in December 2000, according to data from the National Association of Securities Dealers, which regulates brokers. He had no previous regulatory or criminal actions against him.
Sihpol’s bail was set at $750,000 in Manhattan criminal court and he was expected to stay in jail Tuesday night unless he could raise $50,000 in cash necessary to secure bail. Don Buchwald, Sihpol’s attorney, said his client had no criminal intent and “sought and obtained approval” for the trading relationship from executives. In addition, Sihpol consented to being interviewed at Spitzer’s office on Aug. 6, Buchwald said.
Spitzer initially drew criticism from SEC Chairman William Donaldson for failing to give federal officials advance notice of his probe. But on Tuesday the attorney general and SEC enforcement chief Stephen Cutler presented a united front in their mutual fund investigation.
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