Updated from 11:16 a.m. EST
In a bid to head off class-action lawsuits,
Bank of America
is promising to reimburse investors in the wake of last week's allegations of illegal trading activity in mutual fund shares.
The nation's third-largest bank announced Monday morning that it will make "appropriate restitution" to investors in its Nations Fund mutual funds. The Charlotte-based bank is also hiring an independent adviser to investigate the allegations and determine how much money investors are entitled to.
"The board of trustees of the Nations Funds has always taken its fiduciary obligations to its shareholders as the fundamental and guiding principle of all of our activities," the company said. "Bank of America's senior management has been, and continues to be, fully cooperative with our efforts to evaluate the situation as it relates to the attorney general's inquiry, and to take appropriate action in the interests of our shareholders and customers."
BofA is announcing the move just days after New York Attorney General Eliot Spitzer rocked the mutual fund industry with news that his office had discovered allegations of illegal trading activity between a New Jersey hedge fund and four mutual fund families, including BofA's Nations Funds, Janus,
The overture by BofA, however, didn't stop another plaintiffs' lawyer from filing a putative class action against the bank. The lawsuit filed by Pennsylvania attorney Brian Felgoise is third class action filed against BofA since the scandal broke.
Of the four fund families, Nations Funds comes off looking the worst in the Spitzer investigation. Brokers in the bank's Nations Funds unit are accused of helping a hedge fund purchase shares in a mutual fund after the close of the trading, but at their 4 p.m. price. This is practice called "late trading," and it's an absolute no-no in the industry.
All four funds are alleged to have permitted Canary Capital Partners to engage in market timing, an arbitrage strategy that allows savvy traders to take advantage of the time differences between the closing of the U.S. markets and foreign exchanges. While the kind of fast, in-and-out trading that market timers engage is legal, most mutual funds try to discourage it, because it can dilute the value of a fund by incurring unnecessary trading costs.
In offering to compensate its mutual fund investors, BofA is following in the
footsteps of Janus, which said Friday that it, too, was hiring an outside firm to evaluate the allegations and would make any necessary restitution.
Quantifying the impact of market timing on fund investors would be complicated. In its release, Bank of America said, "to the extent the independent firm determines that Nations Funds shareholders were adversely affected by such a discretionary market timing agreement, the adviser will make appropriate restitution."
It also said the adviser "will promptly return to the funds that were the subject of a market-timing agreement all funds management and advisory fees it received as a result of such an agreement. This will occur whether or not there is an independent determination of any negative impact to fund shareholders."
Bank officials still are not saying what, if any, action will be taken against securities broker Theodor Siphol, branch manager Charles Bryceland and Banc of America Capital Management co-president Dan Gordon. Those are three bank employees that Spitzer's office has identified as playing the most active role in the negotiations with the Canary hedge fund.
Spitzer's office contends BofA employees went out of their way to make it as easy as possible for Canary to engage in late trading of mutual fund shares. One memorandum prepared by Sihpol speculates on how valuable Canary's business could be to other divisions of the bank. Indeed, Nations Funds even went so far as to install a computer system at Canary's office that helped them with their late-day trading.