) for its part in the mutual-fund scandal are stiff. In a Mar. 15 settlement with New York State Attorney General Eliot Spitzer and the Securities & Exchange Commission, the Charlotte (N.C.) bank agreed to pay $675 million in fines and restitution -- the most paid by any firm that allowed New York hedge-fund firm Canary Capital Management to engage in after-hours trading in its mutual funds at the expense of ordinary investors.
The settlement goes a long way toward redeeming Spitzer's promise that mutual-fund wrongdoers at the highest level would be punished: Eight directors at BofA who gave Canary the nod must resign.
However, the deal fails to go all the way. To date, only one BofA sales broker, Theodore C. Sihpol III, stands accused of criminal deeds for facilitating Canary's trades. Spitzer's office says the settlement won't preclude him from pursuing more BofA staff, but the tacit understanding is that the investigation is over. Says a BofA spokesman: "As far as we know, this settles the matter with the SEC and Spitzer's office."
BONUS COMING. If so, it looks like senior bank executives are apparently off the hook again. Fewer than a dozen BofA employees who were connected with the mutual-fund scandal, out of 100,000 employees, have left the bank. While BofA won't say they were fired, Robert H. Gordon, chief executive of Banc of America Capital Management LLC, and Charles D. Bryceland, the director of brokerage and private banking, have gone. Neither has been charged with any offense.
Their boss, asset-management chief Richard M. DeMartini, may receive as much as $2.5 million in salary and $2 million bonuses for 2004, according to regulatory reports filed by the bank. DeMartini reports directly to BofA CEO Kenneth Lewis and will retire on Apr. 1. He'll stay on as a consultant during the merger with Fleet, according to bank documents.
Hundreds of the bank's mutual funds allowed Canary to profit from special market-timing concessions while preventing other investors from doing so. But even Edward J. Stern, who ran Canary, got off relatively easy. The Stern family, one of New York's wealthiest (see BW, 2/9/04, "Dynasty In Distress"), paid $40 million from their $3 billion fortune to settle with Spitzer. The fine equals just 5.5% of Canary's assets at its 2002 peak. Stern, who neither admitted nor denied guilt, agreed not to trade in mutual funds or manage any public investment funds for a decade.
NO NOSE HOLDING. Sihpol faces severe penalties. He's accused of allowing Canary to place trades in shares of the bank's funds after the market closed at 4 p.m., according to the original Sept. 3 complaint filed by Spitzer. Ordinary investors who place orders after 4 p.m. get the next day's price. But special deals, allegedly masterminded by Sihpol, allowed Stern to trade and profit on market-moving news after hours and before new values were set.
If found guilty of larceny and securities fraud, Sihpol faces 8 to 25 years in state prison. The 36-year-old will also likely never work on Wall Street again. The SEC is weighing whether to levy civil penalties, force him to return whatever commissions he earned from the Canary business, and ban him for life from the industry.
Sihpol may have set the Canary relationship in motion with a cold call to the hedge fund. But he hardly acted alone. The exhibits in Spitzer's complaint show that his dealings with Stern were openly discussed, fully approved, and even applauded by several layers of the bank's management. "There was no one at the bank holding their noses or suggesting that there was anything wrong," says Sihpol's attorney, C. Evan Stewart of the New York law firm Brown Raysman Millstein Felder & Steiner. "No one told him if you cross this line, you're exposed to criminal liability."
O.K.s EVERYWHERE. Spitzer's complaint quotes Sihpol as saying that after meeting with Stern in April, 2001, Sihpol sought approval for late-trading allowances from the bank's clearing-unit executives. They approved the trades. A memo to his supervisor, Bryceland, describing the relationship was approved. Senior bank compliance executives gave him the nod. The investment manager of the Nations Funds, which Gordon led, approved. The bank's private-banking group approved financing for Canary, extending a $200 million line of credit. Equity-derivatives execs approved Stern's short sales. The bank's information-technology group even built an electronic platform that allegedly allowed Stern to trade after the official 4 p.m. cutoff, according to the complaint.
All this leaves unanswered questions about the flaws in BofA's internal oversight mechanisms. If top managers didn't know what was going on, they certainly should have. Until securities law enforcers draw the execs into the net and put their futures on the line, there'll be no guarantee that unacceptable behavior won't happen again. Der Hovanesian is Finance & Banking editor for BusinessWeek in New York