Sep. 6–In his first major crisis since taking over Bank of America Corp. in the spring of 2001, Chief Executive Ken Lewis said Friday he would punish any employees involved in improper trading ofmutual fund shares.
“We have a keen sense of urgency about this,” Lewis said. “But we also have to balance that with a sense of fairness and thoroughness.”
Lewis and his Charlotte-based bank are caught in the crossfire of New York Attorney General Eliot Spitzer’s charges that Canary Capital Partners LLC engaged in illegal trading with several large mutual fund companies.
Bank of America — which has not been charged with any wrongdoing — was named in a court complaint filed by Spitzer as having the most extensive trading relationship with Canary.
“The biggest concern I always have is that there is damage to Bank of America’s reputation,” Lewis said in a telephone interview with reporters Friday. “That’s why we say nobody has the ability to act outside our values, no matter how much potential somebody has or how much they produce.”
The 56-year-old Lewis, who is also chairman, sent a memo to the bank’s 134,000 employees Friday, noting the bank has its own investigation ongoing. He told reporters the internal probe began before Spitzer announced a $40 million settlement with Canary on Wednesday.
Lewis said he believed the number of employees involved in wrongdoing — if any — was “very, very small” and that any actions against them would “probably take a few days.”
A key question is whether the bank’s mutual fund brokers did anything illegal. The mutual fund industry has long operated on the understanding that all clients are to be treated equally.
Spitzer’s complaint paints a picture of Bank of America providing special treatment to Canary in exchange for business from owner Edward Stern, whose family is one of America’s wealthiest.
Brokers allowed Canary to trade mutual fund shares after the 4 p.m. market close at the day’s closing price — a move that is considered illegal. Such trades can capitalize on after-hours increases in share prices, an advantage not afforded to ordinary customers.
But that’s not all, according to the complaint: Bank brokers also were well aware that Canary’s group was timing the market, which involves going in-and-out of the fund in short periods of time — a move that often hurts the value of the fund for other investors.
Lewis said Friday, “My first reaction was one of disappointment that someone could have betrayed that bond of trust. Anger is the second emotion.”
Lewis has cut ties with tainted employees before. In January 2002, the bank fired three employees who managed the firm’s business with Enron Corp. after the bank lost $231 million with the disgraced energy trader.
Bank employees named by Spitzer in the complaint include Theodore Sihpol, a broker; Charles Bryceland, a branch manager; Robert Gordon, chief executive of Banc of America Capital Management; and Richard DeMartini, president of the bank’s asset management businesses, which include mutual funds.
According to e-mails listed in Spitzer’s complaint, Sihpol brought in Stern as a client in 2001; Bryceland commended Sihpol for the market timing relationship; Gordon checked the relationship with other executives; and DeMartini knew of the arrangement in January.
Lewis said all employees mentioned in the complaint are still working at the bank. He said he planned to meet with DeMartini Friday afternoon. Later, bank officials declined to comment.
Since Lewis took the helm, Bank of America’s reputation has steadily improved from the days of rampant mergers and acquisitions. He has overseen a 50 percent rise in the share price in his two-plus years as CEO. At the same time, the bank has sailed past profit expectations on Wall Street. In July, the bank reported record earnings of $2.74 billion, up 23 percent, in the second quarter, compared with the year-ago period.
The bank avoided being tarred by a Wall Street securities investigation by Spitzer that netted a $1.4 billion settlement with 11 Wall Street investment banks earlier this year. Lewis personally approved a “Higher Standards” advertising campaign that began in February.
To lessen its dependence on consumer banking, the company has been adding brokers to its asset management division, which makes up about 5 percent of the bank’s total revenues.
Lewis said Friday the company still expects to double its asset management division and eventually earn about 15 percent of its income from the unit.
Bank of America’s brokers may have felt intense pressure to keep profits at levels previously created in the market’s heyday, said Tim Ghriskey, who owns Connecticut hedge fund Ghriskey Capital Management.
“I do think that the pressure on these individuals was intense and that might have tipped the scale into them allowing some rules to be broken,” Ghriskey said.
Lewis said that taking improper actions for a client is a concept that is “totally alien to our value system.”
While Bank of America had the strongest relationship with Canary, Spitzer also named Bank One Corp., Janus Capital Corp. and Strong Capital Management Inc. in the Canary investigation.
The allegations against Bank of America and its executives have sent analysts reeling.
The complaint singles out Nations Funds, one of the bank’s biggest families of mutual funds.
Morningstar, one of the nation’s largest mutual fund analysis companies, recommended Friday that investors with a Nations Funds account get out quickly.
The recommendation is only to abandon Nations Funds, not the bank’s other funds.
“Your money is at stake every day,” said Russel Kinnel, director of fund analysis at Morningstar. “Planners and brokers are going to have a hard time of keeping their clients in those funds.”
After falling 4.1 percent since Tuesday, Bank of America shares closed down 9 cents at $76.15 Friday.
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(c) 2003, The Charlotte Observer, N.C. Distributed by Knight Ridder/Tribune Business News.
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