B of A paying $3 million to Sequor clients.

SAN FRANCISCO - BankAmerica Corp. said it will refund about $3 million to some customers of a securities unit formerly owned by Security Pacific Corp. following a probe of the unit's trading and investment practices.

In a statement released earlier this week, the San Francisco-based bank company said it had determined that the Sequor Group made unauthorized investments of customer funds. Although the statement said no customers were harmed, sources said the motive was to boost Sequor's own profits.

Practices Discontinued

The company said all the transactions took place before BankAmerica's April 1992 acquisition of Security Pacific, adding that the unauthorized practices have been discontinued.

The company said it had completed its nearly year-long- examination of securities lending operations at New York-based Sequor. Results have been forwarded to bank regulators.

"BankAmerica considers the matter closed," the company's statement concluded.

Sources said three Sequor securities lending executives resigned as the investigation closed: senior vice presidents Howard Miller and Martin Gerber and vice president Keith Leonard. The bank declined to comment, and the individuals could not be reached.

Virtually the entire pre-merger senior management of Sequor has now either been forced out or resigned voluntarily. Sequor itself has been disbanded, and its various processing and trading businesses distributed among other BankAmerica units.

The nation's second largest bank company launched its investigation last summer. According to people familiar with the probe, that was about the same time that regulators from the Federal Reserve Bank of San Francisco began a wide-ranging examination of Sequor.

Referred to Justice Department

The Fed examiners discovered trading practices they deemed improper and perhaps illegal, the sources said. Under pressure from the Fed, BankAmerica this winter referred the case to the Justice Department, indicating possible criminal violations, sources added.

BankAmerica declined to comment on any referrals. The Justice Department has refused to comment on the case.

A San Francisco Fed spokesman said his agency is "examining" BankAmerica's review, but declined further comment.

The bank said no customers were "disadvantaged" as a result of the investment practices in Sequor's securities lending unit. The company regularly invested cash collateral derived from securities lending in high-yield instruments having a longer maturity than the related security loans, and booked the extra income as profit.

The mismatch was "funded by placing customer funds in accounts which earned nominal interest, a practice not authorized under the lending agreements," the bank said.

BankAmerica said it will reimburse about 60 of Sequor's 100 institutional securities lending customers "for the opportunity cost of investing their cash ... plus interest."

No Link to Pension Probe Seen

In an interview, a senior BankAmerica official said the trading activities under review were unrelated to pension law violations discovered at Sequor during a pre-merger exam of the securities lending unit. The official, who asked not to be identified, said those violations involved Sequor's role as a trustee for pension funds.

Upon the discovery, BankAmerica asked Security Pacific to notify the U.S. Labor Department, which enforces the Employee Retirement Income Security Act of 1974. Security Pacific paid penalty taxes, the official said.

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