At Bank of America Corp.'s annual meeting in April, chairman and chief executive Kenneth D. Lewis joked with a shareholder that having a headquarters far from Wall Street may have kept regulators from targeting the company in a probe of research and investment banking misdeeds.
"I wish you wouldn't call us to New York's attention," he told shareholder activist Evelyn Y. Davis, who had asked how B of A might be affected by the $1.4 billion settlement between regulators and 10 investment banks over allegations of biased research. "It's one of the great privileges of being in Charlotte, North Carolina, as opposed to being headquartered in New York."
This week, as the architect of that settlement, New York Attorney General Eliot Spitzer, focuses on B of A, alleging trading improprieties by its mutual fund arm, Mr. Lewis may well be trying to evaluate the potential damage to the $769 billion-asset company.
Will it end up facing a multimillion-dollar settlement, like April's global settlement with the big investment banks? Will any of the B of A executives named in Mr. Spitzer's complaint lose their jobs or be reassigned? And perhaps more important, will the scandal do long-term damage to B of A's carefully tended reputation?
Mr. Spitzer alleges that Bank of America and three other mutual fund firms - Bank One Corp., Janus Capital Corp., and Strong Capital Corp. - gave improper trading privileges to a New Jersey hedge fund, Canary Capital Partners LLC.
Asked Thursday whether Bank of America planned to fire or discipline any executives or employees, spokesman Robert Stickler would say only that it was still "looking into the issue."
"I can't speculate at this point," he said.
Mr. Spitzer's complaint named two key players, the Manhattan-based broker Theodore C. Sihpol 3d and his branch manager, Charles D. Bryceland, who helped establish and maintain the relationship with Canary. Mr. Spitzer's complaint also said that top executives in B of A's asset management group, which is based in New York, were aware of the deal with Canary, though the complaint also hints at some disagreement over whether it was proper.
In the settlement with Canary, Mr. Spitzer alleged that B of A had allowed Canary to engage in "late-day trading" and "timing." In late-day trading, a buyer purchases mutual fund shares after 4 p.m. at that day's closing price, which could give it an advantage if post-closing developments affect the shares' value. "Timing" involves day trading of a mutual fund's shares, often using delays between time zones.
Analysts said Thursday that timing is not explicitly illegal, but most mutual funds discourage the practice, which can dilute the value of shares held by long-term investors.
Among those who apparently knew of the arrangement were Robert H. Gordon, the president of Banc of America Capital Management, which includes the NationsFund mutual fund group; and his boss, Richard DeMartini, the president of B of A's asset management group. The asset management group is one of the company's three main business lines and includes capital management, brokerage, and the private bank.
B of A's relationship with Canary was apparently a profitable one, and executives at the company at one point praised one another for it, according to Mr. Spitzer's complaint. Mr. Spitzer said that B of A had a "multilayered" arrangement with Canary that brought in millions of dollars in fees. B of A made money not only on trades using its proprietary electronic trading platform, but also from loans and derivatives. As part of the deal, Canary also made investments in other B of A funds, which generated additional fees.
However, while most analysts said it is likely that B of A may take action against the brokers, few if any thought that the bank's internal disciplinary actions would travel very far up the chain of supervision at the company.
"I think [Bank of America's] attitude is maybe that a rogue trader did this ... that Bank of America cannot be held accountable for what rogue traders do," said Richard X. Bove, an analyst with Hoefer & Arnett of San Francisco. "Nobody of consequence in the organization will be fired," he predicted.
"I've certainly gotten the sense that Ken Lewis is as clean as they come, in terms of bank managers," said Brock Vandervliet, an analyst with Lehman Brothers.
However, he added " if it comes down that people are at fault in something like this," Mr. Lewis may decide one of those executives will have to "pay."
In a statement Thursday, Bank of America did not admit wrongdoing. "The Canary relationship is the only customer with which we had an agreement to permit market timing in our mutual funds. We will continue to work with the Attorney General's Office to address their concerns regarding this type of market activity," the company said.
B of A added that its policies prohibit late-day trading, which also is banned under trading regulations. While it did not admit to allowing the practice, it said Thursday that it was investigating "any potential issues in the application of our policies."
Though B of A officials surely would like the matter to end quickly, analysts noted that the allegations, fueled by Canary's cooperation, could lead to months of scrutiny, not only by Mr. Spitzer, but also by the Securities and Exchange Commission. As in his probe of Wall Street research practices last year, Mr. Spitzer grabbed headlines Wednesday, and the agency may try to regain the initiative by bearing down harder, Mr. Bove said.
Canary has agreed to pay $40 million in restitution and fines and is cooperating in an investigation of practices that Mr. Spitzer says enabled it to profit at the expense of mutual fund investors. Bank of America, which Mr. Spitzer alleges installed a "state-of-the-art" electronic trading platform at Canary's office, and the other fund firms have not been charged, but Mr. Spitzer hinted that more charges are possible. He said Wednesday's announcement was only "day one" in a broad investigation of the mutual fund industry.
(William H. Donaldson, the SEC chairman, issued a statement Thursday morning calling the activities alleged in Mr. Spitzer's complaint "reprehensible" and saying the allegations show the importance of an ongoing SEC review of both hedge funds and mutual funds. He said the SEC plans to recommend better disclosure requirements for both industries.
"The broad participation by individual investors in mutual funds requires that we do everything possible to understand, anticipate, and address areas where there is the potential for abuse and fraud," he said in the statement.)
The SEC is reportedly sending out letters to fund companies and other financial firms demanding they explain their policies on the trading practices Mr. Spitzer is investigating.
Mr. Bove said he believes B of A eventually will reach a settlement with regulators and agree to pay a "substantial" penalty, in the "$100 million to $200 million range," which is comparable to the fines levied in this spring's global research settlement.
Still, most sell-side analysts on Thursday appeared willing to buy B of A's statement that the arrangement with Canary was an isolated situation, not a symptom of a deeper problem. Most reiterated their "buy" ratings on B of A's shares, calling any decline in the stock price temporary and a buying opportunity."
Christopher M. Seidman of Friedman, Billings, Ramsey & Co. Inc., took a slightly dimmer view, downgrading B of A to "market perform," from "buy." Mr. Seidman wrote in a research note issued Thursday that B of A's statement did not refute Mr. Spitzer's allegations. B of A and the other companies under investigation could ultimately face fines as well as a wave of shareholder lawsuits, Mr. Seidman said.
At the same time, headlines from the investigation could make investors shy about investing in B of A's funds, he said. Nonetheless, Mr. Seidman left his 2003 and 2004 earnings estimates for B of A unchanged.
Its shares were down 2.3% on Thursday, to $76.24, and have fallen 4% from Tuesday's close, before news about the investigation broke.
