Just weeks after paying a big fine for its financial dealings with Enron, the Canadian Imperial Bank of Commerce faces imminent regulatory action for providing more than $1 billion in financing toinvestors who made illegal mutual fund trades, according to people briefed on the inquiry.
The New York State attorney general, Eliot Spitzer, and the U.S. Securities and Exchange Commission are expected to file suits in a few of weeks against Canadian Imperial for arranging these financings, the people briefed on the investigation said. The regulators could also file suit against senior executives who were aware of the activity, they said.
Through the financing, the bank helped hedge funds to make far bigger bets in mutual fund shares, primarily though the use of derivatives. In some cases, the bank financed trades made after stock trading had closed but at an earlier price, according to those briefed on the investigation.
A spokesman for Canadian Imperial Bank of Commerce declined to comment on the regulators’ inquiry, other than to confirm that the bank was cooperating with the investigation.
Last month, Canadian Imperial reached an $80 million settlement with the securities commission over financings it had arranged for Enron. Those deals allowed Enron to hide debt and inflate its profit by over $1 billion and its operating cash flow by almost $2 billion, according to the regulators’ settlement.
In the mutual fund investigation, the activities in question probably produced relatively little profit. The financings being examined by regulators would have yielded just a few million dollars in fees, said Frank Partnoy, a law professor at University of San Diego and a former Wall Street trader.
They couldn’t possibly have made enough money to have made it worth it, Partnoy said.
Other companies under investigation for their role in improper fund trading have also said their gains from such activities were small. Janus, for example, has said it will return $32 million to investors in its funds to compensate them for improper trading.
In the case of Canadian Imperial, the bank may have been eager to bolster its investment bank in the United States, one person briefed on the investigation said. For years an insignificant player, it made some headway in the 1990’s in specialized areas, including junk bonds and off-balance-sheet financings.
The bank became involved in the fund financing at the request of a broker at Oppenheimer & Co., which it owned for about five years before selling a majority stake in the firm a year ago, this person said.
The bank has said little since the regulators’ interest was disclosed about two and a half weeks ago. But it has quietly stopped financing short-term mutual fund trades by hedge funds, according to a person briefed on the bank’s activities. It has also forced out several executives, according to people who know the individuals.
Two traders, Paul Flynn and Jeffrey Haas, were quietly asked to leave in December after the bank learned they had been contacted by regulators, these people said. Their departures were previously reported by the financial news Web site Thestreet.com.
Keith Wellner, a lawyer who sat near the two men on the trading desk and reviewed the financings, has also left, they said, as has Robert Deutsch, a managing director who supervised the two traders. Deutsch sat right next to them, said Michael Lubin, a former trader at the bank, referring to Flynn and Haas.
Deutsch reported to Brian Shaw, deputy chairman of CIBC World Markets, the investment banking subsidiary of the bank.
