Mutual Fund Scandal: Bank of America and FleetBoston Face $515 Million Penalty

Strategic Insights -

Bank of America and FleetBoston Financial Corp. agreed to pay $515 million in fines and restitution, and reduce fees by $160 million, in the largest penalties yet in the mutual fund scandal. The institutions were accused of allowing market timing, a practice that allows some customers to make rapid-fire trades at the expense of other fund shareholders. As part of the settlement, eight trustees of Bank of America's Nations Funds will leave the board within a year. This marks the first case of trustees being held accountable in the scandal.

Key Takeaways:

  • Bank of America and FleetBoston agreed to pay $515 million in fines and restitution, the largest penalty yet in the mutual fund scandal.
  • The institutions were accused of allowing market timing, a practice that allows some customers to make rapid-fire trades at the expense of other fund shareholders.
  • Eight trustees of Bank of America's Nations Funds will leave the board within a year, marking the first case of trustees being held accountable in the scandal.
  • The two firms agreed to improve oversight of the funds, implement a mandatory retirement age, and policies on independence and rotation of trustees.
  • About 90% of Bank of America's restitution will go to shareholders of other funds.
  • The settlement includes a $160 million reduction in fees charged to investors over five years.
  • This is the first settlement with a mutual fund accused of allowing Canary Capital Partners to engage in market timing and late trading.
  • The SEC has insisted that enforcement actions are not the appropriate vehicle to lower fund fees.

Statistics:

  • The penalty of $515 million is the largest yet in the mutual fund scandal.
  • $250 million of the penalty will be paid in restitution to affected shareholders.
  • $125 million of the penalty will be paid in fines to the SEC.
  • Bank of America's restitution will amount to about $225 million, ($250 million - $25 million used for administrative expenses).
  • FleetBoston's restitution will amount to $70 million.
  • The two firms will reduce fees charged to investors by $160 million over five years.
  • This is the first case of trustees being held accountable in the mutual fund scandal.

Sources:

  • http://www.chicagotribune.com/ (c) 2004, Chicago Tribune.
  • Distributed by Knight Ridder/Tribune Information Services.