WASHINGTON–The U.S. Securities and Exchange Commission ordered mutual fund and broker-and-clearing-firm arms of Bank of America to pay US$375 million to settle charges of market timing and late trading. The case primarily centered on trading in Nations Funds mutual fund shares.
In a statement Wednesday, the SEC said Banc of America Capital Management (BACAP) LLC, BACAP Distributors LLC and Banc of America Securities (BAS) LLC had entered “into improper and undisclosed agreements that allowed favored large investors to engage in rapid short-term securities trading known as market timing in certain Nations Fund mutual funds and for fraudulently facilitating market timing and late trading in Nations Funds mutual funds as well as unaffiliated mutual funds.”
In the settlement, to which Bank of America units consented without admitting or denying the commission’s findings, the units will pay US$250 million in disgorgement and US$125 million in penalties. The money will be distributed to the mutual funds and their shareholders harmed as a result of market-timing and late trades.
Market timing is not illegal, but it is believed to harm ordinary mutual fund shareholders by diluting their share value and saddling them with the costs of the trades. Late trading, meaning trades made after the 4 p.m. market close, is illegal.
The commission found that from as early as July 2000 and continuing through July 2003, BACAP, the manager for the Nations Funds family, entered into arrangements with clients of BAS, the broker-dealer, and allowed them to engage in frequent short-term trading.
The commission also found that BAS facilitated market timing and late trading by some introducing broker-dealers and a hedge fund, Canary Capital Partners LLC, Secaucus, N.J., at the expense of Nations Funds shareholders and shareholders in other fund families. These parties executed late trades through BAS’s “Special Mutual Fund Order Entry System,” entering orders as late as 7 p.m. ET. BAS also helped its introducing broker-dealer clients conceal the market timing of their clients from unsuspecting mutual funds, facilitating “hundreds of market-timing trades after the mutual funds had acted to block these entities from further trading,” according to the SEC.
Mark K. Schonfeld, regional director of the commission’s Northeast Regional Office, said, in a statement, “Today’s order details the conduct of Bank of America on three levels–as a mutual fund adviser, as a broker and as a clearing firm. As a fund adviser, BACAP permitted timing in its own funds. As a broker and clearing firm, BAS enabled late trading and market timing in many other mutual funds. This settlement will help ensure compensation for victims and help protect against a recurrence of such misconduct.”
Bank of America issued the following statement: “Bank of America is pleased to have this issue behind it. The company has repeatedly demonstrated that such activities in no way represent the way Bank of America does business. The company quickly investigated the allegations, took swift action including the dismissal of accountable employees and has put in place many enhancements designed to strengthen the mutual funds operation. Throughout it has fully cooperated with all authorities.”
The SEC’s action was brought contemporaneously with a related action by the Attorney General of the State of New York, the federal Office of the Comptroller of the Currency and the Attorney General of the State of New York.
Robert Stickler, a spokesman for Bank of America, said the company had agreed to a similar settlement with the New York attorney general’s office.
In April 2004, the state of New York indicted Theodore Sihpol, a broker in Bank of America’s private client unit, on 40 counts of fraud, grand larceny and other crimes in connection with allegedly allowing the Canary fund to conduct late trading (see ). That case is pending.
On Feb. 3, Massachusetts regulators brought a market-timing complaint against three employees of St. Louis-based A.G. Edwards & Sons from activity conducted from the firm’s Back Bay office in Boston (see ).
Contact Bob Keane with questions or comments at: firstname.lastname@example.org.