CHARLOTTE, N.C. (AP) – Bank of America Corp. will establish a restitution fund for shareholders of its Nations Funds who lost millions of dollars because of alleged improper trading that gave a hedgefund advantage over other investors.
“Nothing is more important in our business than the trust and confidence of our customers and clients,” chairman and chief executive officer Ken Lewis said in announcing the fund Tuesday.
Bank of America had said last month it would repay members of its Nations Fund if an analysis finds investors suffered a loss from alleged late trading with Canary Capital Management LLC. The arrangements allowed Canary to cash in on after-hours news ahead of other investors by getting that day’s closing fund price after 4 p.m., though regulations require those trades to be priced at the next day’s closing price.
Criminal charges were filed against a BofA broker last month, shortly after he was fired for his alleged involvement in the late trades.
The Charlotte-based bank is the third investment firm to pledge to make restitution in a widening mutual fund scandal.
Last month, Canary and its managers agreed to pay $30 million in restitution for profits generated from improper trading and a $10 million penalty to settle allegations lodged by New York Attorney General Eliot Spitzer.
Janus Capital Group said earlier this month it would return about $1 million in fees it made from short-term trading. Canary’s settlement neither admitted or denied wrongdoing.
Spitzer said Canary engaged in illegal trading practices with mutual funds operated by Bank of America, Janus, Bank One Corp. and Strong Financial Corp.
On Tuesday, Fidelity Investments, one of the nation’s biggest mutual fund concerns, said it received a subpoena from Spitzer’s office late last week and is cooperating with the probe.
“The request for information was regarding market timing and late trading. Those are the same targets for which (Spitzer) is seeking information from several other firms,” Anne Crowley, a spokeswoman for Boston-based Fidelity, said. “We understand it to be part of a broader look at market timing and late trading.”
Spitzer’s complaint said Bank of America had the most extensive trading relationship with Canary, providing special treatment in exchange for big-money business from the hedge fund’s owner, Edward J. Stern, an heir to the Hartz pet supplies fortune.
Spitzer charged a former Bank of America broker, Theodore Sihpol III, with larceny and securities law violations.
And last week, a former trader at Millennium Partner, Steve Markovitz, pleaded guilty to making illegal late trades in mutual funds.
In Massachusetts, Secretary of State William F. Galvin, whose office regulates securities trading in the Bay State, has launched investigations of financial services firms including Prudential Securities and Putnam Investments.
Meanwhile, a growing list of mutual fund companies have fired or suspended employees following internal investigations of trading activities.Merrill Lynch & Co., Alliance Capital Management Holding LP and Prudential Securities have suspended or fired a total of at least 17 employees.
Securities and Exchange Commission chairman William Donaldson said last month the commission will consider tightening oversight of the high-risk, largely unregulated $600 billion hedge fund industry.
On Tuesday, Bank of America also said it would extend its restitution offer to shareholders of third-party mutual funds who were harmed if Canary, its affiliates, or others fail to make them whole.
Bank of America’s promise makes it responsible as the source of “restitution of last resort” for the injured mutual-fund holders, spokesman Bob Stickler said.
The bank also said it has hired Dale Frey, former chairman of General Electric Investment Corp., to handle an independent review of the bank’s mutual fund policies and practices.
Maureen Scannell Bateman, a former general counsel of State Street Corp. and U.S. Trust, will conduct a legal review of the funds, Lewis said.
Bank of America said it also employed Promontory Financial Group to coordinate a detailed review of all technology, control, and compliance systems related to the mutual fund business. The review will include all systems relating to sales, clearing, and derivative and brokerage operations.
