Board members beware. In addition to racking up a gargantuan $675 million settlement with Bank of America and FleetBoston Financial last week, regulators made it clear boards are fair game, as it ousted eight of the 10 directors of the beleaguered Nations Funds board.
In an agreement with the Securities and Exchange Commission, BoA agreed to pay $375 million -- $250 million of that in disgorgement and $125 million in penalties. Its dance partner, FleetBoston, was slapped with a $70 million fine and agreed to pay an additional $70 million in restitution, for a total of $140 million, for impropriety at two of its Columbia units.
By the time New York Attorney General Eliot Spitzer was done announcing his separate deal with the duo, which had their pending merger approved by shareholders of both firms last Wednesday, another $160 million was tacked on to that tally, as both firms agreed to reduce the fees they charge investors over the course of five years.
Eight is Enough
Spitzer said the agreement marks a new phase in the overall push to clean up the mutual fund industry, and board of directors are clearly in his crosshairs. "After focusing on the harmful effects of market timing and the problems of excessive fees, we are now taking steps to ensure that mutual fund boards of directors will be more accountable for their actions," Spitzer said in a statement.
As such, eight Nations Funds directors have agreed to resign or will leave the board in the next year, for their role in approving a measure that allowed timing. "The departure of these board members should sound an alarm for all those who serve in similar capacities," Spitzer said.
"The activities at BoA were very egregious," said Burton Greenwald, president of consulting firm B.J. Greenwald & Associates. "Here the board not only knew of, but they gave affirmative approval to, timers."
In May 2002, the board took steps to discourage market timing in its funds, while at the same time allowing preferred customers to race in and out. The board approved a 2% redemption fee as a penalty for selling its international funds less than 90 days after purchase. However, at the same time it passed this measure, it also approved waving the fee for hedge fund Canary Capital, which subsequently excessively timed two of the funds. "These directors clearly failed to protect the interest of investors," Spitzer said. "They acknowledged the problem of market timing, but then allowed a favored client to engage in that harmful practice."
Don Phillips, managing director of Morningstar of Chicago, said the removal of the eight board members is "entirely appropriate," if not far reaching enough. "It would have been astonishing if they were allowed to keep their jobs," he said. "The job of the directors is to look out for the interests of shareholders. At a minimum, they should lose their job. It's not clear to me these directors are facing any kind of financial or reputational risk," he said, noting those ousted had not been identified as of press time.
Representatives from the Bank of America declined to name the members on the outs, but did provide MME with a list of the current 10-person board. Chairing the group since last year is William Carmichael, a senior managing director of The Succession Fund, and a trustee since 1999. Minor Mickel Shaw, president of Micco Corp., joined the board as a trustee in 2003 and is the only member who came on board after the approval of the Canary timing deal.
The remaining eight have all been trustees since 1999. William Grigg, former chairman and CEO of Duke Power, is reportedly retiring at the end of the year, along with two other members. The other independent trustees are Thomas Keller, Carl Mundy, Jr., Dr. Cornelius J. Pings, and Charles Walker. Edmund Benson, III, James Sommers and Thomas Word, Jr. are all listed as interested trustees. The board members are paid more than $110,000 to oversee the firm's mutual funds assets.
"It sends a good signal that boards need to be more vigilant than in the past," said Phil Edwards, managing director of fund research at Standard & Poor's, of the turnover.
Far From Over
BoA also agreed to exit the securities clearing business by the end of the year and said it will take a first-quarter charge of 16 cents a share.
"Bank of America not only permitted timing in its own funds, it provided the instruments for timing and late trading of numerous other funds through its broker/dealer," said Mark Schonfeld, associate director of the SEC's Northeast regional office, in a statement. "This settlement will ensure compensation for all victims of the harm that resulted and prevent this misconduct from happening again."
Interestingly, BoA said that of the $250 million in disgorgement and restitution it agreed to pay, only $25 million will go to Nations Funds shareholders. The rest will be available to help repay shareholders of other funds using BoA systems. BoA said other mutual fund complexes granted timing capacity to hedge funds and other investors and that it will seek "appropriate recompense" from "such parties" based on the damage done by their actions.
"We have said the actions of a few individuals and what occurred is not representative of the way Bank of America does business, and we have no tolerance for actions that violate our values," the Bank said in a statement.
The settlement did not resolve the fate of one of those individuals accused of wrongdoing, former BoA broker Theodore C. Sihpol, III. He is potentially facing a quarter century behind bars and is charged with criminal grand larceny and securities fraud and federal civil charges. It also did not provide clarity on the futures of eight Columbia executives and portfolio managers placed on leave in the wake of developments there.
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