Canadian Imperial Bank of Commerce
, stung by allegations it financed unethical trading in mutual fund shares, has set aside C$50 million to cover the cost of possible settlements with securities regulators.
The Toronto-based bank disclosed that it had set aside the money in its first-quarter earnings report Thursday. The bank, in a press release, said, "We do not expect these investigations to have a material adverse impact on CIBC's consolidated financial position or results of its operations."
The bank, in Canadian dollars, earned $609 million, or $1.54 per share, compared to $445 million, or $1.11 per share, a year ago.
Earlier this week, a grand jury indicted Paul Flynn, a former CIBC investment banker in New York, on security fraud charges stemming from his role in arranging the financing deals.
Late last year, CIBC fired Flynn and his associate, Jeff Hass, the two bankers that had led the bank's hedge fund financing arm. A few weeks later, Robert Deutsch, Flynn and Hass' immediate supervisor, also left the bank. An in-house attorney who reviewed the financing deals also recently left CIBC.
The bank, which has said it is cooperating with the investigation, is believed to be in settlement talks with the
Securities and Exchange Commission
and New York Attorney General Eliot Spitzer over its role in the mutual fund trading scandal.
Flynn's indictment is a significant turn in the investigation into the $7 trillion mutual fund industry because CIBC was allegedly the biggest financier of hedge funds engaged in market-timing and late trading. Market-timing and late trading are the two main types of inappropriate mutual fund trading being investigated in the sprawling inquiry that encompasses dozens of money management fund companies, brokerages and hedge funds.
Flynn's group at CIBC had specialized in credit derivatives, most commonly "total return swaps," a popular leverage tool in the hedge fund world. Hedge funds favor the vehicle, in which the economic performance of a specified asset is exchanged for cash payments pegged to a benchmark, because they act like loans with a more favorable tax treatment. The group also provided standard margin loans.
Sources said the total return swaps enabled hedge funds to invest several times as much money as they normally could have. The SEC, in its complaint, alleged that Flynn negotiated and structured swaps and loan agreements that provided the hedge funds with leverage of at least 3-to-1 to trade in mutual fund shares.
Many of the hedge funds that received financing from Flynn's group were customers of
Oppenheimer & Co.
broker Michael Sassano, said by regulators and securities industry sources to be a central figure in the mutual fund investigation. Sassano had been a top-performing broker at CIBC before the Toronto-based bank sold the Oppenheimer division in early 2003.
The past several months have not been good ones for CIBC's investment. In December, the bank paid $80 million to settle allegations that it and three of its executives helped fallen energy trader
cook its books.
The SEC, in settling with CIBC, charged the bank engineered 34 transactions for Enron that allowed the now-bankrupt company to deceive investors by structuring loans as asset sales. Enron used those deals to increase earnings by more than $1 billion, to increase operating cash flows by almost $2 billion, and to avoid disclosure of more than $2.6 billion in debt.
CIBC is one of several major financial institutions including
J.P. Morgan Chase
( MER) and
Credit Suisse First Boston
( CSR) that are being sued by Enron's shareholders in a pending multibillion-dollar class action. Regulators also have imposed stiff fines on Citigroup, J.P. Morgan and Merrill over their roles in the Enron scandal.
As part of its settlement with the SEC, federal prosecutors agreed not to prosecute CIBC and its employees, as long as the bank agreed to adopt new ethical standards and financing policies. The bank also must stop arranging the kind of structured finance deals it did with Enron.
The fallout from the Enron mess and the mutual fund trading scandal has led to a shakeup at CIBC World Markets, the firm's investment bank. A few days after Flynn's arrest, David Kassie, the chief executive officer of the investment bank, left CIBC. Gerry McCaughey, vice chair of the firm's wealth management division, has replaced him.