Bank of America on Tuesday promised to reimburse additional mutual fund shareholders and beef up efforts to tackle internal problems related to improper fund trading practices.
Following a rapidly expanding government probe, the USA’s largest consumer bank said it has hired independent experts to review its mutual fund practices, policies and compliance systems.
The bank also promised to repay shareholders of third-party mutual funds harmed by late trading activities if restitution is not otherwise available.
Bank of America already had pledged to repay mutual fund shareholders of its own Nations funds family of funds who lost money because of trading violations under investigation by New York Attorney General Eliot Spitzer.
Last month, Spitzer settled charges with a hedge fund, Canary Capital Partners, that it engaged in illegal trading practices with the mutual fund arms of Bank of America and Bank One, and mutual fund providers Strong Financial and Janus Capital.
One former Bank of America broker, Theodore Sihpol, has been charged with larceny and securities fraud by Spitzer. The bank fired Sihpol and two other executives who have been linked to allegations of improper trading.
Bank of America says it will set up a restitution fund to repay shareholders harmed by Canary’s violations. ”You can measure the damages fairly precisely,” says Eric Zitzewitz, an assistant professor at Stanford University Graduate School of Business.
It has hired the retired chairman of General Electric Investment, Dale Frey, to lead the independent review, and the former general counsel of U.S. Trust and State Street, Maureen Scannell Bateman, to conduct a compliance review. It also hired a company headed by former bank regulator Eugene Ludwig to review its compliance and trading systems.
The bank is taking the right steps by hiring independent experts to conduct a review, says Mercer Bullard, a University of Mississippi law professor and head of Fund Democracy, an advocacy group. But he adds that it’s unrealistic to expect too much.
”They should investigate the independent fund directors, but I doubt that they will.”
Others say that calls for an internal review should be coming from Nations funds’ board of directors, instead of from Bank of America. ”The Nations funds board may not have been completely quiet, but they’ve been missing in action,” says Gary Gensler, co-author of <I>The Great Mutual Fund Trap</I>.
Also this week, Fidelity Investments and Franklin Resources, two of the largest mutual fund managers, said they have received subpoenas from Spitzer as part of the industrywide probe. They stressed the requests for information are not an indication of wrongdoing and said they are cooperating.
