Boatmen's Bancshares is preparing to reimburse at least 100 brokerage customers for losses on mutual funds purchased through its Arkansas investment subsidiary, a state securities regulator confirmed.
The settlement, arising from findings that two brokers systematically misled customers about investment risks, is part of a consent order being hammered out between Boatmen's and the Arkansas Securities Department, according to Bruce Bokony, the agency's chief counsel.
The department and the St. Louis-based banking company had reached "an agreement in principle on the sanctions," he said, but he would not offer more details.
Officials at Boatmen's declined repeated requests for comment on the settlement, which was first reported in the Arkansas Democrat-Gazette.
Experts said the development illustrates the risks banks face as they press further into the investment business. Boatmen's is clearly not alone. On Wednesday, Alabama regulators confirmed they are investigating whether Amsouth Bancorp.'s brokerage unit misled customers about the investment risks of mutual funds.
While some banks have quietly reimbursed unhappy investors for their losses, Boatmen's appears to be the first to contemplate such a sweeping settlement, said Paul Brook, national director of bank mutual funds at Ernst & Young, New York.
"I'm sure it's a signal of more to come," Mr. Brook said, adding: "It's a dangerous precedent for banks to write checks to solve their problems."
Observers also said few banks have worked with securities regulators to settle brokerage disputes. "It basically happens when things are really out of control," said F. Ronald O'Keefe, a partner with the Cleveland law firm of Hahn Loeser & Parks.
Boatmen's pending consent order would settle complaints by customers of two brokers who were found to have misled customers between 1992 and 1994 by failing to disclose the investment risks of certain closed-end mutual funds, Mr. Bokony said. The funds were managed by NationsBank Corp. and Federated Investors.
The brokers were employed by Worthen Investments, a subsidiary of Worthen Bancshares. Boatmen's acquired Worthen last year and now operates the Arkansas brokerage under the name Boatmen's Investment Services.
Last November, Worthen and several of its brokers settled charges of improper sales practices by agreeing to pay $258,400 in fines to the National Association of Securities Dealers. The two brokers involved in the pending settlement are no longer affiliated with Boatmen's.
Observers said that Boatmen's pending plan to settle with a limited group of customers could blunt a broader class action brought against 14 Worthen brokers, including the two named in the deal with Arkansas regulators.
The class action, filed in state court Feb. 6, covers "several hundred" customers, about half of whom were clients of the two brokers, said Robert L. Robinson Jr., an attorney for some of the plaintiffs.
Mr. Robinson, a partner with the Little Rock law firm of Robinson, Staley & Marshall, accused Boatmen's of acting in bad faith by hashing out the settlement with securities regulators while negotiations with the brokerage customers were still under way.
"We think it damages our case because it settles the most egregious conduct," Mr. Robinson said. That's because misleading mutual fund promotions distributed by one of the brokers involved in the settlement would no longer be admissible as evidence, he said.
Separately, the Alabama Securities Commission said Wednesday it is investigating complaints of improper sales practices at Amsouth Investment Services.
The complaints, filed last June by six customers against a former Amsouth broker, Walter Hooper, stem from transactions that took place in 1992 and 1993. The commission alleges that the brokerage failed to properly supervise Mr. Hooper, and that it violated state law by offering incentives to bank employees for steering customers to brokers.
A spokesman with Amsouth said the brokerage unit is working with the state securities commission to resolve the matter. "They are conducting an inquiry and we are doing our best to provide them with the information," he said.
John Kimelman contributed to this report.
