Sep. 20–In some of their first interviews since Bank of America Corp. was cast into the glare of a mutual fund investigation, several Nations Funds trustees told the Observer this week that they dideverything they could to protect shareholders.
Board chairman William Carmichael and long-term trustee William Grigg say they were unaware that a New Jersey hedge fund was using Bank of America’s Nations Funds family for questionable trading practices, which is alleged by New York Attorney General Eliot Spitzer.
The funds’ independent trustees hired New York law firm Willkie Farr & Gallagher LLP to investigate Spitzer’s claims. The trustees also retained Deloitte & Touche LLP to determine whether fund shareholders lost money and to calculate possible restitution.
The four trustees who spoke with the Observer said there is no evidence that shareholders lost money because of the funds’ relationship with Edward Stern, principal owner of Canary Capital Partners LLC.
“We don’t know yet that there has been harm to shareholders,” Carmichael said, adding he did not know when the investigation would be completed.
Spitzer’s investigation, which also includes the Janus Capital Corp., Bank One Corp. and Strong Capital Management families, is the biggest scandal ever to hit the nation’s nearly $7 trillion mutual-fund industry, experts say.
Many of Spitzer’s allegations have focused on Bank of America, which last week dismissed a handful of employees named in Spitzer’s complaint. And former Bank of America broker Ted Sihpol was charged in New York this week with felony, larceny and fraud charges.
The 10 trustees who make up the Nations Funds board have met four times in the weeks since Spitzer began his scrutiny of mutual funds.
Grigg, who was one of the funds’ first three board members and is former chairman and chief executive of Duke Power Co., said he has been asking himself what the board could have done to spot the alleged improper trading: “You always second guess what you could have done to detect it and what kind of controls you could have put in place,” he said.
“I don’t know how a board could have known that a broker in New York was doing something like this. If somebody is doing something wrong, they’re not going to tell you.”
Nations Funds directors oversee more than $134 billion in mutual-fund assets, and each trustee oversees more than 80 funds. Together they wield considerable power, including the ability to fire Bank of America as the funds’ manager.
Carmichael, who lives near Chicago, declined to discuss specific issues regarding the industry investigations. He also would not discuss whether the trustees would take steps to discourage the trading practices called into question by Spitzer.
Regulators are scrutinizing whether Nations Funds was involved in market-timing practice and another practice known as late trading.
Late trading involves purchasing mutual-fund shares after the 4 p.m. market close at that day’s closing price and is considered illegal. While market timing is legal, some mutual fund companies restrict it because it can have a detrimental effect on long-term investors, such as retirees. Bank of America states in its mutual-fund prospectuses that they discourage market timing.
Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said the trustees would likely be unaware of the trading violations.
“I don’t doubt their sincerity on this,” said Elson, who owns Bank of America stock. “The trustees have nothing to gain for sanctioning the scheme.”
Carmichael said there was no way the trustees could have known about the alleged late trading and market timing. Carmichael said market timing, which some fund families discourage, can be beneficial to shareholders.
“It’s not that easy to just say that’s good or bad,” he said. “Because it can be helpful to have the money come in.”
Carmichael said Bank of America is committed to correcting any problems that might have led to improper trading. The bank is conducting its own investigation into the trading allegations.
Nations Funds directors meet six times a year on average and most often gather in Charlotte but also in St. Louis and New York. Each trustee is paid a base retainer of $75,000 a year, plus $7,000 per meeting and $1,000 for each telephone meeting.
Each meeting takes nearly two days, during which trustees read binders of paperwork and listen to fund managers’ explain fund performance, comparative benchmarks, and risk profiles, Carmichael said.
“It’s just voluminous information to go through,” he said.
Nations Funds trustees serve indefinite terms; most are between age 60 and 80. Two have served on the board since 1985. Two others have served since 1991, including Thomas Keller, 71, a professor of business at Duke University who did not return calls or e-mails. Trustee Cornelius Pings, former president of the Association of American Universities, said he thought the Nations Funds shareholders had been well served by the board.
Carmichael, 59, is one of the youngest trustees and has served on the board since 1999. Robert Gordon, 42, was the youngest trustee and the only bank employee on the current board. The board and the bank dismissed him from both positions last week after he had been named in Spitzer’s complaint.
When asked if he would advise Bank of America Chief Executive and Chairman Ken Lewis to dismiss others named in Spitzer’s complaint, Carmichael said: “I don’t try to tell him how to run his business.”
Staff researcher Sara Klemmer and Staff Writer Stella Hopkins contributed to this article.
ON THE BOARD: Nations Funds trustees are charged with assuring funds are managed in the best interests of shareholders, according to the Investment Company Act of 1940.
Four of the trustees live in the Carolinas. Compensation figures are for the fiscal year ended March 31, 2003.
INDEPENDENT TRUSTEES:
–William Carmichael; 59; senior managing director of the Succession Fund in Chicago; chairman and trustee since 1999; total compensation: $119,431
–William Grigg; 70; retired chairman and chief executive of Duke Power Co. in Charlotte; trustee since 1991; total compensation: $140,800
–Thomas Keller; 71; professor of business administration at Duke University in Durham; trustee since 1991; total compensation: $138,100
–Carl Mundy, Jr.; 68; former president and chief executive officer, USO from May 1996 to May 2000 in Alexandria, Va.; trustee since 1996; total compensation: $112,000
–Cornelius Pings; 74; former president of the Association of America Universities in Washington, D.C.; trustee since 1999; total compensation: $111,000
–Minor Mickel Shaw; 56; president of Micco Corporation and Mickel Investment Group in Greenville, S.C.; trustee since May 2003; total compensation: N/A
–Max Walker; 81; former chairman of the board and independent financial consultant; trustee since inception; total compensation: $159,250*
–Charles Walker; 64; former chief financial officer of Albemarle Corp. in Richmond, Va.; trustee since 1985; total compensation: $111,000
INTERESTED TRUSTEES:
–Edmund Benson III; 66; director, president and treasurer at Saunders & Benson Inc. insurance firm; trustee since 1985; total compensation: $111,000
–Robert Gordon; 42; former vice chairman of the board and president of the Trust and president of Bank of America Corp.’s mutual fund division in New York; trustee since 2002; total compensation not listed*
–James Sommers; 63; retired chairman of Central Piedmont Community College Foundation in Charlotte; trustee since 1997; total compensation: $111,000
–Thomas Word, Jr.; 65; partner in McGuire, Woods, Battle & Boothe LLP law firm; trustee since 1985; total compensation: $111,000
* Walker recently died. Gordon was dismissed from duties at Bank of America Corp. and the Nations Funds board in early September.
Source: Nations Funds form N-1A filing with SEC July 31, 2003; Staff reporting
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