CHARLOTTE, N.C. – Bank of America Corp. will establish a restitution fund for shareholders of its Nations Funds who lost millions of dollars because of alleged improper trading that gave a hedge fundadvantage over other investors.
“Nothing is more important in our business than the trust and confidence of our customers and clients,” Chairman and Chief Executive Officer Ken Lewis said in announcing the fund Tuesday.
Bank of America had said last month that it would repay members of its Nations Fund if an analysis finds investors suffered a loss from alleged late trading with Secaucus-based Canary Capital Management LLC. The arrangements allowed Canary to cash in on after- hours news ahead of other investors by getting that day’s closing fund price after 4 p.m., although regulations require those trades to be priced at the next day’s closing price.
Criminal charges were filed against a Bank of America broker last month, shortly after he was fired for his alleged involvement in the late trades.
The Charlotte-based bank is the third investment firm to pledge to make restitution in a widening mutual fund scandal.
Last month, Canary and its managers agreed to pay $30 million in restitution for profits generated from improper trading and a $10 million penalty to settle allegations lodged by New York Attorney General Eliot Spitzer.
Janus Capital Group has said it would return about $1 million in fees it made from short-term trading. Canary’s settlement neither admitted or denied wrongdoing.
Spitzer said Canary engaged in illegal trading practices with mutual funds operated by Bank of America, Janus, Bank One Corp., and Strong Financial Corp.
On Tuesday, Fidelity Investments, one of the nation’s biggest mutual fund concerns, said it received a subpoena from Spitzer’s office late last week and is cooperating with the probe.
Spitzer’s complaint said Bank of America had the most extensive trading relationship with Canary, providing special treatment in exchange for big-money business from the hedge fund’s owner, Edward J. Stern, an heir to the Hartz pet supplies fortune.
Spitzer charged a former Bank of America broker, Theodore Sihpol III, with larceny and securities law violations.
And last week, a former trader at Millennium Partners, Steve Markovitz, pleaded guilty to making illegal late trades in mutual funds.
In Massachusetts, Secretary of State William F. Galvin, whose office regulates securities trading, has launched investigations of financial services firms including Prudential Securities and Putnam Investments.
Meanwhile, a growing list of mutual fund companies have fired or suspended employees following internal investigations of trading activities. Merrill Lynch & Co., Alliance Capital Management Holding LP, and Prudential Securities have suspended or fired at least 17 employees.
Securities and Exchange Commission Chairman William Donaldson said last month that the commission will consider tightening oversight of the high-risk, largely unregulated $600 billion hedge fund industry.
