B of A facing $250 million hit in probe

Friday, March 12, 2004 | 9:17 a.m.

BLOOMBERG NEWS

CHARLOTTE, N.C. -- Bank of America Corp., the third-largest U.S. bank and the largest in Nevada, may pay more than $250 million to settle allegations that executives allowed mutual fund trading by favored clients that hurt the returns of other investors, people familiar with the matter said.

The penalties would be the third highest since New York Attorney General Eliot Spitzer unveiled the investigation of the $7.5 trillion fund industry six months ago. Alliance Capital Management Holding LP agreed in December to about $600 million in fee cuts and sanctions to settle its case, and MFS Investment Management is paying about $350 million.

Bank of America Chief Executive Kenneth Lewis, 56, has fired at least five executives and set aside $100 million for fines since Spitzer accused the Charlotte, N.C.-based company of trading abuses in September. Spitzer and the Securities and Exchange Commission have already filed civil complaints against eight firms in the biggest fund trading probe.

"Right now Bank of America's reputation is tarnished and it will be a challenge in terms of time, money and management attention to deal with this," said Wayne Bopp, who helps manage $35 billion, including Bank of America shares, at Fifth Third Bancorp in Cincinnati.

Robert Stickler, a spokesman for Bank of America, declined to comment, as did Juanita Scarlett, a spokeswoman for Spitzer, and SEC spokesman John Heine.

Spitzer last month said "there's a significant likelihood" that talks with Bank of America would result in a settlement. An agreement may be reached by the end of the month, said the people, who declined to be identified.

Bank of America, with net income of $10.8 billion last year, was fined $10 million Wednesday by the SEC for withholding documents and lying to investigators during a separate trading probe. The bank still faces regulatory probes into allegations of biased stock research and also into its connection to the collapse of Parmalat Finanziaria SpA.

The bank's asset management unit, which has $335.7 billion under management, earned $262 million in the fourth quarter, more than double from the same period a year earlier.

Spitzer said in a Sept. 3 complaint that Bank of America helped the Canary Capital Partners LLC hedge fund earn "tens of millions" from improper trading in exchange for investments that generated millions of dollars in revenue for the bank.

Former Bank of America broker Theodore Sihpol, 36, was charged on Sept. 16 with securities fraud by Spitzer for forming an agreement that let Canary make illegal trades through the bank's computer-clearing system.

Bank of America has dismissed employees, including Robert Gordon, former head of the Banc of America Capital Management mutual fund unit, since the allegations emerged. The company, which is buying FleetBoston Financial Corp. for about $48 billion, has said it will repay holders of any fund hurt by trading through the bank that isn't covered by another party.

Bank of America said in an SEC filing on March 1 that it's possible more than $100 million may be required to cover costs from the trading probe.

Richard DeMartini, who Lewis recruited in early 2001 to be president of the bank's asset management unit, will leave the company in April, after Bank of America completes its purchase of FleetBoston. DeMartini will get up to $4 million in incentive and lump sum payments this year, plus his base salary. Brian Moynihan of FleetBoston will take over his job.

Separately, FleetBoston's mutual fund group was accused last month by Spitzer and the SEC of allowing $2.5 billion of short- term trades by investors including hedge funds that hurt other holders and violated prospectuses.

"I hope they sort this out soon," said Patrick Vandenhaute, a fund manager at Dexia Asset Management in Brussels, which owns shares of Bank of America.

Shares of Bank of America have risen 1 percent since September, lagging the 15 percent gain of the 24-member Philadelphia KBW Bank Index.