CHARLOTTE, N.C. (AP) — Bank of America Corp. said it is prepared to make “appropriate restitution” to shareholders who might have lost money because of improper trading of mutual fund shares atits Nations Funds business.
The Charlotte-based bank also said Monday it was hiring an outside firm to review mutual fund trades involving Canary Capital Partners LLC, a multimillion-dollar hedge fund. Janus Capital Group issued a similar statement Friday in response to an investigation by New York Attorney General Eliot Spitzer.
Spitzer announced last week that Canary had agreed to pay $40 million to settle charges that it had engaged in illegal trading practices with several large mutual fund companies, including Bank of America, Janus, Bank One Corp. and Strong Financial Corp.
None of the mutual fund firms named in the complaint have been accused of a crime, but Spitzer has said charges are likely. All have said they are cooperating with investigators. Other mutual and hedge funds also have been subpoenaed in the case.
Adding to the pressure on the fund giants, the Wall Street Journal reported Monday that the Justice Department’s U.S. attorney in Manhattan, James Comey, has notified other regulators that he plans to join the probe. Comey’s office declined comment Monday.
According to Spitzer’s complaint, 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.
Hedge funds are largely unregulated investment partnerships of wealthy individuals and institutions; they are known for aggressive trading strategies and higher risks. Mutual funds are managed groups of investments that are publicly traded and subject to federal regulation; they are sometimes lower-risk, and are widely considered to be a safe purchase for buy-and-hold investors.
Spitzer’s complaint states that brokers allowed Canary to trade mutual fund shares at their 4 p.m. closing prices well after New York’s markets shut down. Such trades are considered illegal because they can capitalize on after-hours increases in share prices, an advantage ordinary customers don’t have.
Bank brokers also were aware that Canary’s group was timing the market, which involves going in-and-out of the fund in short periods of time, the complaint states. While not technically illegal, market timing tends to lower overall returns for long-term shareholders and is prohibited by most mutual funds.
Bank of America said Monday that an outside firm would determine if any of its shareholders lost money because of the strategies used by Canary. Regardless of the independent firm’s findings, the bank will return any related management and advisory fees to the appropriate funds, it said in a statement.
“We have a great sense of urgency on this matter and we plan to act decisively,” bank spokesman Bob Stickler said Monday.
Ken Lewis, the bank’s chairman and chief executive, promised last week that he would punish any employees involved in the improper trading.
In a memo sent Friday to the bank’s 134,000 employees, Lewis said the bank had launched its own investigation. He said he believed the number of employees involved in wrongdoing, if any, was “very, very small” and that any actions against them would “probably take a few days.”
Besides DeMartini, the bank employees named in Spitzer’s complaint include broker Theodore Sihpol, branch manager Charles Bryceland and Robert Gordon, chief executive of Bank of America Capital Management.
According to e-mails cited in the complaint, Sihpol brought in Stern as a client in 2001, Bryceland commended Sihpol for the market timing relationship, and Gordon checked the relationship with other executives. DeMartini knew of the arrangement in January, according to the e-mails.
