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July 06, 2004 at 08:00 PM
CHICAGO (HedgeWorld.com)–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.
