The penalties imposed on Bank of America (BAC ) 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.”
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.