Bank of America and FleetBoston Financial will pay a total $515 million to resolve allegations of improper mutual-fund trading and will reduce fees investors pay by $160 million in the biggest fund scandal settlement to date, federal and New York state authorities said Monday.
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 what has become an industrywide investigation.
“These directors clearly failed to protect the interest of investors,” said New York Attorney General Eliot Spitzer, who brought the first charges last September in the scandal that has rapidly enveloped the $7 trillion fund industry. “They acknowledged the problem of market timing, but then allowed a favored client to engage in that harmful practice. The departure of these board members should sound an alarm for all those who serve in similar capacities.”
Under the tentative agreement, which must be formally approved by regulators, Bank of America will pay $125 million in civil fines and $250 million in restitution to investors.
leetBoston will pay $70 million in civil fines and an additional $70 million in restitution.
In addition, the two financial titans — which plan to merge — agreed to make certain changes in their mutual fund operations, including the board overhaul.
“The $375 million that Bank of America has agreed to pay and the significant reforms that it has agreed to implement reflect the seriousness of the misconduct in this matter,” said SEC Enforcement Director Stephen Cutler. “We will continue to investigate that misconduct in an effort to hold all responsible parties accountable.”
The $160 million reduction in fees, to be made over a five-year period, was separately negotiated by Spitzer. As their investigations of the fund industry have widened, the SEC has rejected Spitzer’s view that excessive fees charged by fund companies should be cut as part of legal settlements.
Bank of America’s fund trading came under scrutiny last September, when Canary Capital Management LLC agreed to pay $40 million to settle charges it engaged in improper short-term trading and illegal after-market trading with several mutual fund families, including Bank of America — though the bank was not charged at the time.
Last month, the SEC and Spitzer alleged in a civil lawsuit that FleetBoston’s two mutual fund subsidiaries engaged in massive trading abuses over a five-year period that harmed ordinary investors. In the suit filed in federal court in Boston, where Fleet is based, the SEC and Spitzer alleged that Fleet’s Columbia Management Advisors Inc. and Columbia Funds Distributor Inc. allowed the short-term trading — also known as market timing — by favored big-money investors at the expense of more traditional, long-term investors.
The two subsidiaries allegedly carried out the scheme over five years, up until 2003, while publicly saying that they prohibited such trading.
News of the settlement came two days before Bank of America and FleetBoston shareholders were to vote on a proposed merger that would create the third-largest U.S. bank with nearly $1 trillion in assets. Federal regulators have already blessed the deal, and many had expected both institutions would seek to resolve the fund trading issues before Wednesday’s vote.
Last week, Bank of America’s securities operation agreed to pay a record $10 million penalty to settle the SEC’s allegations that it violated laws on record keeping and access requirements.