The proposed settlement requires Bank of America to pay $125 million in civil fines and $250 million to reimburse investors. FleetBoston would pay $70 million in civil fines and an additional $70 million in restitution. Each of the banks, which plan to merge, also agreed to cut fund fees by $80 million over five years.
“The $375 million that Bank of America has agreed to pay and the significant reforms that it has agreed to implement reflect the seriousness of the misconduct in this matter,” said Securities and Exchange Commission Enforcement Director Stephen Cutler.
The SEC must still accept the tentative deal.
New York Attorney General Eliot Spitzer separately negotiated the reduction in fees. As the investigations of the fund industry have widened, the SEC has rejected Spitzer’s view that the fees charged by fund companies should be cut as part of legal settlements.
Also as part of the settlement, eight members of the board of directors of Nations Funds, Bank of America’s group of mutual funds, will have to relinquish their positions within a year for their alleged role in the scandal.
“These directors clearly failed to protect the interest of investors,” said Spitzer. “They acknowledged the problem of market timing, but then allowed a favored client to engage in that harmful practice. The departure of these board members should sound an alarm for all those who serve in similar capacities.”
Bank of America also agreed that by the end of 2004 it would be completely out of the securities clearing business and so will no longer execute transactions for other parties.
“These agreements represent Bank of America’s good faith effort to resolve this matter,” said the company’s Chief Executive Kenneth Lewis. “What occurred is not representative of the way Bank of America does business.”
Bank of America’s fund trading came under scrutiny last September when Canary Capital Management LLC agreed to pay $40 million to settle charges it engaged in improper short-term trading and illegal late trading with several mutual fund families, including Bank of America.
Last month, the SEC and Spitzer alleged in a civil lawsuit that FleetBoston’s two mutual fund subsidiaries engaged in trading abuses over a five-year period that hurt ordinary investors.
In the suit filed in federal court in Boston, where Fleet is based, the SEC and Spitzer alleged that Fleet’s Columbia Management Advisors Inc. and Columbia Funds Distributor Inc. allowed certain large investors to engage in short-term trading, also known as market timing. The subsidiaries allegedly allowed this practice despite publicly saying that it was prohibited.
The settlement will allow Bank of America to focus on completing its purchase of FleetBoston, slated for early April. The companies plan to hold shareholder votes Wednesday on the $47 billion merger.
“It helps clear the deck,” Thomas Giles, a vice president for Dean Investment Associates, told Reuters. “The fact this merger is pending may have driven the decision to settle now.”