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The mutual fund trading scandal continues to pound away at

Bank of America

(BAC) - Get Free Report


The nation's third-largest bank on Tuesday promised to make restitution to investors in "third party mutual funds" who were hurt by the bank's involvement in a scheme to permit a New Jersey hedge fund to illegally make late trades in mutual fund shares.

Bank of America's vow to make whole shareholders of other mutual funds follows an earlier pledge to provide restitution to investors in its own

Nations Funds

mutual fund family. The announcement is the bank's first admission that it may be liable to investors other than shareholders of Nations Fund.

"We are the option of last resort for restitution," said Bob Stickler, a Bank of America spokesman. Stickler would not comment on what other fund families may be implicated in the scandal.

Sources said there's evidence the

Canary Capital Management

hedge fund used a special BofA computer system to make late trades in shares of several outside mutual funds, in addition to shares of Nations Fund. A BofA executive allegedly installed the computer system at Canary to make it easier for the New Jersey hedge fund to make late trades in mutual funds offered by Nations Funds.

The BofA announcement is the latest twist in a rapidly expanding investigation into illegal trading activity between hedge funds and the mutual fund industry that has led to the filing of criminal charges against a former BofA broker and the firings of other former bank employees.

A spokesman for New York Attorney General Eliot Spitzer, who is leading the investigation, declined to comment.

But a civil lawsuit filed last month by Spitzer's office against Canary contained an allegation that the BofA computer system was used to make late trades in mutual funds other than ones offered by Nations Funds.

So-called late trading involves buying shares of a mutual fund at their 4 p.m. closing price long after 4 p.m. and capturing profit on price movements that occur during the interval. It's illegal because investors who submit an order to buy mutual fund shares after 4 p.m. are supposed to buy at the next day's closing price.

Spitzer has compared late-day trading to betting on a horse race after the winner has crossed the finish line.

Last week Spitzer's office snared a guilty plea from a trader at another hedge fund,

Millennium Partners

, for engaging in illegal late trading.

Meanwhile, BofA said it hired Dale Frey, a former General Electric executive, to conduct an "independent review of the company's mutual fund policies and practices."