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Spitzer Spoils Bank of America's Party

$675 Million Settlement in Mutual Funds Trading Case

March 17, 2004

Mutual Fund Timing • Lawsuit Charges Rampant Mutual Fund Timing at Seligman • Federated Settles Mutual Fund Timing Probe • Secret Mutual Fund Timing Alleged at Seligman • PBHG Agrees to Refund $120 Million to Investors • Spitzer Spoils Bank of America's Party --- • Personal Finance News

Shareholders of Bank of America and FleetBoston approved the banks' merger, the final approval in creating a banking powerhouse with nearly $1 trillion in assets. The merger, valued at $47 billion, is expected to be complete in early April.

Mutual Fund Market Timing • Prudential to Pay $600 Million for Market Timing • Waddell & Reed Settles Market Timing Case • Court Overturns Key Mutual Fund Investor Protection • SEC Missed Mutual Fund Abuses, GAO Finds • Mutual Fund Firms Fined $21 Million • Merrill Lynch to Pay $10 Million • Kaplan Brokers Plead Guilty to Late Trading • PBHG Agrees to Refund $120 Million • Fremont Investment Advisors Settles • INVESCO Settles Market Timing Charges with Colorado • Spitzer Spoils Bank of America's Party

But the merger is being completed under a cloud, as Bank of America and FleetBoston agreed to pay $675 million to settle New York state charges that linked them to illegal trading practices in the mutual fund industry.

New York Attorney General Eliot Spitzer said the settlement is the largest yet in the widening mutual fund industry investigation, and includes corrective measures designed to set a new standard for accountability by the directors of mutual fund companies.

The agreement was negotiated jointly by Spitzer's office and the Securities and Exchange Commission.

"This agreement marks a new phase in the effort to clean up the mutual fund industry," Spitzer said. "After focusing on the harmful effects of market timing and the problem of excessive fees, we are now taking steps to ensure that mutual fund boards of directors will be more accountable for their actions."

Under a specific provision of the agreement, eight members of the Board of Directors of Nations Funds, BOA' s mutual fund complex, will resign or otherwise leave the board in the course of the next year for their role in approving a controversial measure that enabled a hedge fund to conduct company-sanctioned market timing of BOA funds.

In May 2002, the Nations Fund board approved a 2 percent redemption fee on sales of its international funds held for less than 90 days. This measure was implemented to discourage market timing. At the same time, however, the approved measure exempted a mutual fund timer from the redemption fee. The exempted hedge fund subsequently conducted extensive timing of two of the funds in question.

"These directors clearly failed to protect the interest of investors," Spitzer said. "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."

In addition to requiring the board members to retire or resign, the agreement also includes a provision that restricts BOA's ongoing involvement in the securities clearing business.

The agreement provides for payments of $250 million in restitution and $125 million in penalties by BOA. Fleet will pay $70 million in restitution and $70 million in penalties.

In a separate agreement with Spitzer's office, BOA and Fleet agreed to reduce the fees they charge investors by $160 million over a five-year period.

The BOA/Fleet settlement is the fourth since the mutual fund industry investigation began last September. Settling firms have paid $1.65 billion to date, eclipsing the value of last year's $1.4 billion settlement with investment banks. Settlement monies in the mutual fund investigation go to a special fund for restitution for consumers.

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