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Bank of America

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, which were tarred by


and the investigation into Wall Street research, the nation's third-largest bank had been largely untouched by scandal.

That changed this week when New York Attorney General Eliot Spitzer revealed that the Charlotte-based bank is at the center of his office's investigation into illegal trading of mutual fund shares.

Now BofA is caught in the crossfire of a scandal that could do its reputation irreparable harm.

The allegations against the bank and its brokers -- none of whom have been formally charged yet -- are more serious than those leveled by Spitzer at any of the other mutual fund firms caught up in the 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.

"It's not just bending the rules. It's a major break," said Timothy Ghriskey, president of Ghriskey Capital Management, a Connecticut hedge fund. "This is very blatant breaking of the law."

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Ghriskey's in a good position to know just how far some mutual fund brokers and salesmen allegedly went in helping the fund, Canary Capital, make late trades. Before starting his hedge fund, Ghriskey was a leading portfolio manager for

Mellon Financial's


Dreyfus mutual fund company. He said it's hard to fathom that anyone at BofA could have allowed such activity to occur, given that late trading is equivalent to letting an investor buy tomorrow's shares at yesterday's prices.

"This is the last thing the (mutual fund) business needed," said Ghriskey. "I hope people go to jail over this."

It's too soon to say whether anyone from BofA or any other mutual fund firm will go to jail. But Spitzer, at a press conference Wednesday, said incarceration was a distinct possibility for some individuals.

For its part, BofA issued a statement on Thursday in which it said it's cooperating with Spitzer's office. The bank also said it "has policies in place that prohibit late-day trading" and is looking into "any potential issues in the application of our policies."

The only good news for BofA and its shareholders is that given the bank's size, it will be able to easily absorb the cost of what's likely to be a hefty fine to settle the investigation.

"It will hit the bank's image more than its bottom line," said Sean Egan, president of Egan-Jones Ratings, a small corporate debt ratings company.

Gimme Credit, a bond research firm, called the Spitzer allegations against BofA "discouraging," but said it doesn't anticipate any impact on the bank's credit quality, "given the diversity of its operations."

Indeed, one thing working in BofA's favor is that its Nations Funds mutual business, with $134 billion under management, accounts for less than 5% of the bank's net income. In the first half of this year, BofA earned $5.16 billion, a 17% gain over last year.

The fact that BofA has many other lines of business besides mutual funds may explain why its shares have fallen just 3% since news of the investigation broke. By comparison, shares of



, another mutual fund firm targeted by Spitzer's offices, have dropped 13%.

At Thursday's closing price of $76.24, BofA shares are still up 13% for the year. The stock hit a 52-week high of $84.90 on July 14.

It's not known when BofA officials learned of the investigation. Spitzer's office said it opened its investigation several months ago.

In August, a number of corporate insiders, including the bank's chairman Kenneth Lewis and vice chairman James Hance, sold a combined $12.7 million in shares, according to Thomson Financial. Lewis' sale, which generated proceeds of $4.6 million, came after he exercised 57,144 options priced at $26.81 a share.

BofA officials could not be reached for a comment on the sales.