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BofA Fires Two Officers Over Illegal Fund Trades

September 12, 2003|Josh Friedman | Times Staff Writer

Bank of America Corp. has fired two employees for allegedly allowing a hedge fund to improperly trade the bank's mutual funds, the first heads to roll in a widening probe of the $6.9-trillion U.S. mutual fund industry, a source familiar with the matter said Thursday.

Meanwhile, BofA and other fund companies said they were taking measures to ensure that improper late trading and market timing -- the tactics cited by New York Atty. Gen. Eliot Spitzer last week when he unveiled his industrywide investigation -- do not occur in the future. Spitzer said the schemes cost U.S. investors billions of dollars a year industrywide.

Theodore Sihpol, a broker at Banc of America Securities' mid-town Manhattan office for wealthy clients, and his supervisor, Charles Bryceland, have been dismissed by BofA, the source said.

Robert Stickler, spokesman for the Charlotte, N.C.-based bank, declined to comment, saying, "It's company policy that we don't talk about personnel matters." Sihpol and Bryceland couldn't be reached for comment.

The fund-trading scandal erupted when Spitzer said BofA let hedge fund Canary Capital Partners engage in illicit after-the-bell trading in several of the bank's Nations Funds in exchange for investing long-term assets in other funds, which allowed the bank to generate asset-based fees. Spitzer also said BofA, Janus Capital Group Inc., Strong Capital Management and Bank One Corp. let Canary engage in the legal but controversial short-term trading strategy known as market timing, to the detriment of long-term shareholders.

Canary settled the charges for $40 million in fines and restitution. None of the fund companies has been charged with wrongdoing, although Spitzer said the probe was continuing. He and federal regulators have sought information from other mutual fund companies.

As the fund industry -- which counts 95 million Americans as customers and until recently had enjoyed an almost scandal-free reputation -- waits to see whether any criminal charges are filed, it is unclear whether other figures tied to the scandal will be dismissed.

"At this time we haven't made any personnel decisions," said Shelley Peterson, spokeswoman at Denver-based Janus. "We have launched an internal review. Our priority is to complete that as thoroughly and as quickly as possible, given the complexity of the matter."

Strong Capital declined to comment on its personnel, and a call to Bank One was not returned.

Fund companies said Thursday that they are taking steps to ensure that intermediaries such as Security Trust Co. in Phoenix -- which also was named in Spitzer's complaint but not charged with wrongdoing -- adhere to the daily 4 p.m. EDT deadline for fund pricing. Orders received after 4 p.m. are supposed to be carried out at the next day's price; after-hours trades processed at the same day's closing price are considered illegal late trades.

"We have begun our own review and are obtaining assurances of compliance with all the relevant rules and regulations," said Anne Crowley, spokeswoman for Boston-based fund giant Fidelity Investments.

She said Fidelity initiated its review even before the Securities and Exchange Commission ordered investment companies to take such steps last week.

At Putnam Investments in Boston, the fifth-largest fund company by assets, spokeswoman Nancy Fisher said Thursday that the company has "received assurances" this week from Security Trust that it was handling trade orders in accordance with SEC regulations. She also said Putnam "rigorously monitors trading activity with firms like [Security Trust Co.] daily as part of our stringent market timing controls."

"We are looking closely into our relationship with STC as well as reviewing carefully our relationships with other intermediaries regarding the handling of our mutual fund trading orders," said Matthew Walsh, spokesman for San Mateo, Calif.-based Franklin Templeton Investments.

Stickler said BofA was investigating "the way we operated and our policies and procedures against improper trading."

Strong declined to comment except to note that Chairman Dick Strong has written to investors, "We can assure you that we are turning over every rock at our firm as part of our own comprehensive review and that we are committed to acting in the best interests of our clients."

BofA's firings send a strong message, said Russ Kinnel, director of fund research at Morningstar Inc. in Chicago.

"You can't have a cultural change with the same people in place," he said. "Too much of the fund industry has gotten sales-oriented. They're not acting as long-term stewards of investors' capital."

A study issued Thursday sheds light on the damage caused by illegal late trading.

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