BofA, Fleet Come to Terms with Spitzer, SEC in Fund Probe

March 16, 2004 ( - Bank of America and FleetBoston Financial yesterday agreed to pay $675 million to resolve charges that they helped favored clients trade mutual funds improperly at the expense of ordinary investors.

The settlement was announced yesterday by New York Attorney General Eliot Spitzer.   It calls for Bank of America to pay $125 million in penalties and $250 million to reimburse investors, while Fleet agreed to pay $70 million in fines and $70 million in restitution.

In a separate agreement with Spitzer’s office, each bank also agreed to reduce the fees they charge investors by $80 million over a five-year period. The settlements are the largest to date in the fund probe.

The SEC must formally approve the proposed settlement, but isn’t expected to consider the matter until late March or early April.

The Bank of America-FleetBoston settlement is the fourth thus far in the mutual-fund probe that came to light last September.  Other settlements announced to date include MFS (see  MFS Scandal Settlement Finalized ), Alliance (see  Alliance, Regulators Reach Settlement), and Putnam (see Putnam, SEC Reach Securities Fraud Settlement ).  

Board “Call”

The deal also calls for Bank of America to leave the securities-clearing business by year-end, and eight members of the board of directors of Nations Funds, Bank of America’s group of mutual funds, also will be required to resign their positions within a year for their alleged role in allowing the trading violations — the first sanction of its kind in the industrywide investigation.

Bank of America didn’t admit to or deny the SEC’s claims that it permitted timing in its own funds and provided help for timers, including Canary Capital, a New Jersey hedge fund, through its own broker-dealer operation.

According to the Wall Street Journal, FleetBoston also reached an agreement in principle with the SEC in which it will pay $140 million to settle claims of trading abuses at two of its subsidiaries, Columbia Management Advisors Inc. and Columbia Funds Distributor Inc. The SEC filed a civil lawsuit in February (see    FleetBoston Faces SEC, Spitzer’s Lawsuit Wrath ) alleging the FleetBoston subsidiaries allowed some customers to engage in timing despite its stated policy to prohibit timing, the rapid buying and selling of fund shares that can hurt long-term shareholders.

Bank of America was one of the first firms to be named in the trading scandal (see  Spitzer Fund Abuse Probe Pumps Out More Subpoenas ).   Subsequently the SEC and Spitzer’s office alleged that senior executives at FleetBoston’s money-management unit approved secret agreements to let sophisticated investors trade rapidly in mutual funds at the expense of ordinary shareholders. Regulators said traders engaged in $2.5 billion of rapid-fire transactions in at least seven mutual funds from 1998 to the summer of 2003 at Fleet’s Columbia Funds and its predecessors (see  FleetBoston Places Embattled Managers on Leave ).