FleetBoston Financial Corp.’s two mutual fund subsidiaries engaged in massive trading abuses over a five-year period that harmed regular investors, regulators alleged in a civil lawsuit Tuesday.
In the suit filed in federal court in Boston, where Fleet is based, New York Attorney General Eliot Spitzer and the Securities and Exchange Commission allege that Fleet’s Columbia Management Advisors Inc. and Columbia Funds Distributor Inc. allowed short-term trading by large investors at the expense of more traditional, long-term investors.
“Columbia managers and executives knew that making arrangements with market timers was harming long-term investors, but they facilitated it because it was a lucrative source of fee revenues,” Spitzer said.
The SEC alleged the subsidiaries carried out the scheme over five years, up until 2003, while “representing publicly that it prohibited such trading.”
“By putting their own financial interests ahead of their clients’ interests, this investment adviser and broker-dealer violated their most basic duties and violated the trust that mutual fund shareholders placed in them,” said Stephen Cutler, director of the SEC Division of Enforcement.
Regulators claim the company secretly promoted the market timing arrangements by “favored institutional clients in return for infusions of assets that generated management fees,” according to Spitzer’s statement.
Spitzer released part of a portfolio manager’s correspondence to the president of Columbia Funds Distributor. The manager wrote that timers’ “trading has increased and it has become unbearable. There will be long-term damage to the fund.”
A FleetBoston corporate spokeswoman didn’t immediately respond to a request for comment.
Columbia Funds Distributor secretly entered into arrangements with at least nine companies and individual investors, according to the SEC.
The practice would be a violation of the fiduciary responsibility of corporate officers under law including New York’s Martin Act. Spitzer used that act to prosecute brokerages for conflicts of interest by stock researchers.
Since September, a growing number of fund firms and executives have been accused of improper trading and defrauding investors, while dozens of other organizations are under scrutiny by state and federal authorities. Spitzer’s office uncovered the scandal.
In October, Bank of America announced it planned to merge with Fleet, which then would have created the nation’s second-largest bank behind Citigroup Inc.