The filing of criminal charges Tuesday against a Bank of America Corp. employee raised the stakes in investigations by the New York attorney general and the Securities and Exchange Commission into mutual fund sales abuses.
It did little, however, to clarify what outcome the companies involved may face.
Though the charges announced Tuesday were limited to the lowest-ranking Bank of America employee named in the Sept. 3 complaint filed by New York Attorney General Eliot Spitzer, outside experts spoke of a number of possibilities.
Mr. Spitzer's announcement of grand larceny and securities fraud charges against Theodore C. Sihpol are based on allegations that the New York-based broker for Banc of America Securities helped arrange for a New Jersey hedge fund to illegally trade shares in B of A's Nations Funds family of mutual funds.
According to the charges, Mr. Sihpol admitted during an interview with investigators to executing or canceling orders on the basis of calls received from Canary Capital Partners LLC after the close of trading. If convicted of the larceny count, Mr. Sihpol faces mandatory jail time of between 8 1/3 and 25 years.
Mr. Spitzer declined to say what might come next, but he did say further charges were not out of the question.
"I don't want to make any predictions - that would be improper - but it is certainly possible, theoretically, that individuals as well as entities will be subject to being charged for the behavior that we are uncovering and have uncovered," he said.
Stephen Cutler, the SEC's enforcement chief, simultaneously announced a civil enforcement action against Mr. Sihpol, alleging violations of several federal securities laws. The agency is seeking penalties that may include permanently banning him from the securities industry.
The charges are the first since Mr. Spitzer unveiled an investigation of "late-day trading" and "market timing," which he says hurt mutual fund investors. On Sept. 3, Mr. Spitzer announced a $40 million settlement with Canary, of Secaucus, N.J., and its managing director, Edward Stern. The attorney general's complaint said that Canary's "most extensive late-trading and timing relationship" was with Bank of America.
Christopher J. Bebel, a former SEC prosecutor who is now a partner with Shepherd Smith & Bebel PC of Houston, said that the filing of criminal charges immediately "ratchets up" the situation for the Charlotte company.
"If this particular individual has engaged in the same type of conduct as other Bank of America employees, it becomes more likely that a criminal indictment will be sought with respect to Bank of America itself," Mr. Bebel said.
On Tuesday a spokesman for B of A reiterated that it is "cooperating fully with law enforcement and regulatory agency inquiries."
Criminal charges against the company would be the most extreme outcome. Mr. Bebel said a more likely scenario is that the implicit threat of further charges would make more senior executives consider settling.
Lynn A. Stout, a professor at the law school of the University of California at Los Angeles, took a somewhat different view, noting that the charges against Mr. Sihpol might have been made to elicit information.
"It is standard practice among prosecutors throughout the country to put pressure on lower-level employees in the hopes they will become a favorable witness for the government," Ms. Stout said. "And certainly charging someone is a form of putting pressure."
Still, she said, that Mr. Spitzer and the SEC confined their charges to a lower-level employee may suggest a reduced chance of criminal action against senior executives.
Instead, Ms. Stout said, the move exposes Bank of America to "significant risk of civil liability" for failure to supervise its employees or to take steps to prevent the actions in question. "Federal securities law places obligation on employers in situations like this to take affirmative steps to make sure their employees are not violating the law," she said.
"A settlement with Spitzer would hang a target around Bank of America's neck," Ms. Stout said. In addition to Nations Funds, Mr. Spitzer's probe has so far targeted Bank One Corp., Janus Capital Corp., and Strong Capital Management Inc. He has subpoenaed documents from other firms, including Vanguard Group and Invesco Funds Group Inc.
Mr. Cutler said it is still too early to tell if the charges Tuesday were the tip of the iceberg or the iceberg itself, though Mr. Spitzer said that at a minimum "there are a lot of ice cubes out there."
Mr. Spitzer added that the mutual fund probe has an "ever-widening reach. Information that is probative and of interest to us continues to pour in at a rate that is surprising even by our expectations," he said.
Mr. Sihpol is among several employees that Bank of America dismissed last week. Also fired were Robert H. Gordon, the head of Banc of America Capital Management, who oversaw the fund group; and Charles Bryceland, Mr. Sihpol's branch manager in New York. B of A also said it dismissed "several other" employees.
Mr. Bebel called it "odd" that Mr. Spitzer filed criminal charges after not doing so in the investment banking crusade that made him a household name.
"Given the fact that little regulatory action was previously taken to rein in these previous role violations, it's perplexing that the first shot across the bow as to an individual is in the criminal rather than the civil arena," he said.
Analyst Richard X. Bove of Hoefer & Arnett Inc., of San Francisco, speculated that Mr. Spitzer may feel more free to be aggressive in this investigation, since the mutual fund industry is a far smaller part of the New York economy than the investment banking industry.
"We are moving diligently to address any issues within our company in order to maintain the trust of our customers," said the spokesman, Robert Stickler. He declined to comment directly on the charges filed on Tuesday.
Officials said Mr. Sihpol turned himself in to New York authorities Tuesday morning. Calls to his Connecticut home and to his lawyer, Don Buchwald of New York, were not returned.
