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Portfolio > Mutual Funds

Bank One Unit Settles with Spitzer, SEC

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CHICAGO (–Two days before it merges with J.P. Morgan Chase & Co., creating the nation’s second-largest bank, Bank One Corp. announced a settlement of mutual fund market-timing allegations made by the New York State Attorney General and the Securities and Exchange Commission.

Banc One Investment Advisors Corp., a Columbus, Ohio-based unit of Bank One, agreed to pay US$10 million in fines and US$40 million in civil penalties, all of which will be deposited in an escrow and distributed to mutual fund shareholders harmed by the market timing. An independent consultant will devise a plan to distribute the funds, and that plan will have to be approved by the SEC and company’s board of trustees.

In addition, the firm agreed to reform its compliance and mutual fund governance functions by requiring mutual fund board chairmen to be independent, requiring enhanced compliance and ethics controls, improving disclosure of fund fees and expenses and hiring full-time staff to evaluate the way fees are negotiated.

Mark A. Beeson, former president and chief executive of One Group Mutual Funds and a former senior managing director at Banc One, also settled charges he played a key role in allowing market timing in One Group mutual funds. He agreed to pay a US$100,000 fine, be banned from the mutual fund industry for two years and abide by a three-year probation on serving as an investment adviser and as an officer or director of a mutual fund.

In a separate agreement with New York State Attorney General Eliot Spitzer’s office, Banc One Investment Advisors agreed to cut its mutual fund management fees by US$40 million over five years.

Bank One’s settlements are the latest in a series by large mutual fund companies. All had been charged with allowing hedge funds and other investors to conduct quick in-and-out trades of mutual fund shares in order to take advantage of short-term price movements–market timing–or of accepting trade orders after the 4 p.m. ET market close, a practice known as late trading.

In Bank One’s case, state and federal authorities said one hedge fund in particular, Canary Capital Partners LLC, Secaucus, N.J., was given unfair advantage. The SEC and New York State Attorney General’s office said Banc One Investment Advisors allowed Canary to market time some One Group mutual funds in exchange for investing long-term assets in other mutual funds. The long-term investments provided additional management fees for Banc One Investment Advisors, according to the state and federal complaints.

Additionally, Banc One Investment Advisors did not charge Canary the estimated US$4 million in redemption fees it would have had to pay for its market-timing trades based on the funds’ prospectuses but did charge other investors such fees. The firm also had no written policies regarding disclosure of fund positions and other confidential to some parties but not others. And it loaned Canary the money to engage in the market-timing trades, again expecting the payoff to come in the form of higher advisory fees from the so-called “sticky” Canary assets.

In a statement, Bank One officials said the procedural and governance reforms reached through the settlement would provide additional protections for investors going forward.

“The monetary and governance actions outlined in these agreements build upon the controls and policies we initiated last fall to fulfill that commitment,” said David J. Kundert, chairman and chief executive of Banc One Investment Advisors. “Strong procedures are now in place to further protect the interests of our mutual fund shareholders and prevent a recurrence of similar issues in the future.”

In October, Bank One officials disclosed that an internal investigation found that Canary had been given permission to trade shares of 11 One Group mutual funds “more frequently than other customers.” At that time, bank officials also said Mr. Beeson had been replaced as One Group’s president and that Security Trust Co., Phoenix, had been fired as the bank’s administrator.

SEC officials said in a statement that the settlement shows mutual fund managers cannot enrich themselves by allowing market timing, which harms long-term shareholders by passing the timers’ transaction costs on to them.

Other firms announcing settlements with federal and state regulators recently include Strong Capital Management Inc., Menomonee Falls, Wis.; Bank of America Corp., Charlotte, N.C.; and FleetBoston Corp., Boston.

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Contact Robert F. Keane with questions or comments at: [email protected].


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