SEC Formalizes Bank of America Mutual Fund Settlement

Updated from 1:52 p.m. EST

The SEC formally signed off Wednesday on a $515 million settlement that covers violations by Bank of America(BAC) and FleetBoston in the mutual fund trading investigation.

A tentative settlement with the SEC was announced last April, shortly before Bank of America acquired Fleet in a $49 billion merger. At that time, the banks reached a separate settlement with New York Attorney General Eliot Spitzer, whose office initiated the investigation into abusive trading in mutual fund shares.

The deal with Spitzer's office included $160 million in fee reductions for investors in Fleet's Columbia funds. With the fee reductions, the $675 million settlement is the largest paid by any party in the mutual fund scandal.

In settling with Bank of America, the SEC also announced that it had charged five former Columbia fund executives with failing to disclose secret market-timing trading deals with some investors. Three of those executives settled with the SEC.

Market-timing is the term for a shady strategy in which mutual fund shares are bought and sold frequently in order to profit from price differences in different markets. Another offense being probed by regulators, late trading, is the buying or selling of mutual fund shares after their 4 p.m. closing price, in order to take advantage of late-breaking or market-moving news.

Bank of America played a central role in the trading scandal and helped the now-infamous Canary Capital Partners hedge fund to engage in late trading. The bank's brokerage arm set up a special trading platform to permit Canary, among others, to place trades.

The bank's former stock clearing arm also processed trades for smaller brokers who had customers that were engaging in market timing and late trading. As part of the settlement, Bank of America was forced to exit the clearing business. The Charlotte, N.C.-based bank sold its clearing arm last June to Automated Data Processing(ADP).

In the settlement unveiled Wednesday, the SEC revealed that Bank of America actively marketed its clearing platform to market timers and abusive mutual fund traders. Regulators allege the bank entered into clearing agreements with three registered broker-dealers whose clients engaged in mutual fund market timing.''

Yet despite Bank of America's role in the trading scandal, only one executive has been charged criminally in the investigation: Theodore Sihpol, a former broker. A year ago, Spitzer's office indicted Sihpol on multiple counts of grand larceny and falsifying business records. Prosecutors allege the former broker helped Canary making its illegal late trades.

Sihpol is scheduled to go on trial next month in New York state Supreme Court in Manhattan.

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