Sep. 9–Bank of America Corp. said Monday it will reimburse investors who may have lost money because of questionable trading practices in its mutual fund division.
The announcement comes days after New York Attorney General Eliot Spitzer alleged that Bank of America allowed Canary Capital Partners LLC, a New Jersey hedge fund, to engage in illegal trading. Mutual fund experts say the trades may have harmed individual investors by decreasing the value of some funds.
Neither Bank of America nor Spitzer’s office could say Monday how many investors may have been hurt by the alleged improper trades, which occurred between 2001 and 2003. Mutual funds typically measure their value by assets, not the number of investors.
The bank’s Nations Funds family of mutual funds is ranked No. 13 in the nation with about $134 billion in assets, according the Investment Company Institute, a mutual fund trade association based in Washington. The entire industry manages nearly $7 trillion in assets.
Bank of America spokesman Bob Stickler said it would be impossible for individual investors to know if their funds were devalued because of improper trading.
The Charlotte-based bank is reviewing each fund in its Nations Funds family to see if its value was affected by Canary transactions. The bank has not been charged with wrongdoing.
In a civil complaint against Canary, Spitzer alleged that Bank of America brokers allowed Canary to trade mutual fund shares after the 4 p.m. market close at that day’s market 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.
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 funds in short periods of time — a move that often hurts the value of the funds for other investors.
Canary agreed last week to pay $40 million in restitution and fines to settle Spitzer’s charges.
Spitzer also named Janus Capital Corp., Bank One Corp., and Strong Capital Management Inc. in the Canary investigation. Janus said Friday it would repay management and advisory fees to damaged investors. A handful of other mutual fund companies also are being subpoenaed by Spitzer’s office.
Bank of America, which announced its own internal investigation last week, also said Monday that it would refund management and advisory fees from improper transactions.
Meanwhile, the Nations Funds Board of Trustees said Monday it would hire an outside firm to evaluate the allegations. The trustees did not release the name of the firm.
Mutual funds represent a small percentage of Bank of America’s business, accounting for only about 5 percent of earnings. Still, news of possible wrongdoing drove down the bank’s stock 4.1 percent last week. Its shares closed Monday at $76.98, up 83 cents on the New York Stock Exchange.
Bank spokesman Stickler said the company did not know how long its investigation will take. But Andrew Collins, an analyst with U.S. Bancorp Piper Jaffrey said Bank of America is “going to move exceptionally fast in addressing this issue and that’s really what needs to be done for shareholders and investors.” Collins does not own Bank of America shares but said his firm does try to solicit the bank’s business.
Phil Larkins, a fund manager for Northern Trust in Atlanta, which owns Bank of America stock, said he believed the stock price would rebound.
“If they can sort of act very aggressively and proactively in addressing it, than their damage from this will be relatively small,” he said.
Eric Zitzewitz, assistant professor of economics at Stanford University whose research on mutual funds is cited in Spitzer’s complaint, questioned how Bank of America will calculate restitution and when the amount might be announced.
“What are they going to be liable for?” Zitzewitz asked.
Zitzewitz estimated in an October 2002 study that mutual funds lose $4 billion each year to market timers.
Stickler said the bank isn’t sure how or what restitution would be paid because the company is still investigating.
Stickler said one way the bank could possibly pay restitution is by putting a sum of money back into each fund involved in improper trading.
“The problem is going to be (that) today’s shareholders aren’t necessarily yesterday’s shareholders,” he said.
In California Monday, a lawsuit representing investors was announced by attorney Brian Felgoise of Philadelphia. The suit charges that Bank of America and its officials violated securities laws by issuing false and misleading statements to investors. Investors also have filed suits against the Janus and Strong families of mutual funds.
NATIONS FUNDS
The New York Attorney General listed the following Nations Funds portfolios in its complaint against Canary Capital Partners LLC for alleged improper trading. Bank of America said it is compiling its own list.
Nations International Equity Fund
Nations Small Cap Fund
Nations Convertible
Nations Emerging Markets
Nations Short-Term Income Fund
Nations Short-Intermediate Government Fund
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