Bank One Coughs Up $90M for Shady Deals
July 5, 2004
Bank One Corp.'s mutual fund arm on Tuesday agreed to a $90 million settlement with New York state and federal regulators for allowing hedge funds to engage in abusive round-trip trading of its fund shares, a racket that depleted the returns of long-term shareholders.
The latest enforcement action against a tainted fund manager puts an end to the first chapter of a storied fund scandal that began last September when New York Attorney General Eliot Spitzer named Bank One, Strong Capital Management, Bank of America and Janus Capital as key targets of a widespread investigation of mutual fund trading practices. Bank One was the last of the four firms to settle with regulators.
But that doesn't close the book on the scandal by a long shot. Despite the mainstream media's waning interest in market timing and late trading allegations, there are plenty of more cases pending. "The SEC made some very serious allegations against a very well-known and very conservatively managed fund company in American Funds," said Andrew Clark, senior research analyst at fund-tracking firm Lipper "The scandal is going to go on."
Under the terms of the settlement with the Securities and Exchange Commission, Banc One Investment Advisors will pay $40 million in fines and $10 million in restitution. In a separate agreement with Spitzer's office, BOIA will slash management fees by $40 million over the next five years. Within the next 45 days, BOIA will submit for review a schedule of funds for which the reduced fee rate will be established.
"Mr Spitzer is in the catbird seat, and he along with other state regulators will probably have the ability to mandate fee reductions when it comes to settlements," Clark said. "But that's only for a few years. Eventually, it's going to fall back to the regulators to seriously follow through on getting fees and commissions out in the open."
Another stipulation of the deal is that Mark Beeson, former president of Bank One's One Group Funds, was slapped with a two-year bar from the fund industry and a $100,000 fine for orchestrating the short-term trades, which contradicted the funds' internal compliance controls and the language of their prospectuses. He is also precluded from serving as an officer or director of an investment manager for a period of three years.
"Banc One and Mark Beeson blatantly disregarded the well-being of One Group Funds' long-term shareholders," said Stephen Cutler, director of the SEC's division of enforcement. "[The] sanctions show that the Commission continues to aggressively pursue mutual-fund advisors - and their senior management - when they place their own interests above those of fund investors."
For Beeson's part, he was found to have entered into an agreement with Edward Stern, manager of New Jersey hedge fund Canary Capital, through which Stern executed roughly 300 trades within One Group funds, transactions that earned Stern $5.2 million. In connection with the activity in certain One Group international funds, Beeson failed to charge the appropriate redemption fees outlined in the funds' prospectuses. He also spearheaded an effort to loan money to Stern with the express understanding that the proceeds would be re-invested in One Group Funds.
The case stands out from most of the other cases the SEC has handled in that Beeson provided listings of portfolio holdings of several of the One Group Funds to Stern, information that is ordinarily restricted from public view, Robert Brunson, senior associate regional director of the SEC's Midwest office, told Money Management Executive. He noted that Beeson's decision to play favorites and release sensitive portfolio information was a decisive factor in determining his punishment.
"Mark made a bad business decision in allowing Stern to do this," Beeson's attorney Paul Fishman said in a telephone interview. "The truth is he's glad it's over."
Fishman noted that despite his eventual error in judgment, Beeson was quite opposed to market timing. "He had turned down overtures from Canary on previous occasions. But people on the bank side of the business were trying to establish a relationship with the Stern family. They asked Mark to take another look at what Stern wanted to do. He did that. He consulted with other people at the funds. He placed restrictions on Stern and satisfied himself that no one would be hurt."
Fishman went on to say that Beeson believed in good faith that the conduct that he was permitting Stern to engage in would not hurt shareholders in any way. "There is nobody at the SEC who thinks different than that," he said. When asked about Beeson's plans now that the scandal has been put to bed, Fishman replied simply, "He's looking for a job."
Tying the Knot