bank of new york

[FaGal]

Agencies Investigate Bank of New York
11.09.2004, 05:24 PM

Bank of New York Co. said Tuesday it is being investigated over its role in a trading scheme that led to criminal charges against former executives at a small Dallas mutual fund firm.

The New York-based bank said "various governmental and self-regulatory agencies have sought documents and other information" from the company as part of the year-long investigation into improper mutual fund sales practices.

Specifically, Bank of America cited market-timing trades that its Pershing LLC unit cleared for a firm called Mutuals.com.

Mutuals.com had just $200 million in assets under management, but vocally promoted its Vice Fund, which invests in so-called sin stocks.

In December, regulators began cracking down on Mutuals.com. The Securities and Exchange Commission charged the company, three of its executive officers and two affiliated broker-dealers, with fraud related to improper trading of mutual-fund shares.

On top of that, three executives - Richard Sapio, the former chief executive; Eric McDonald, the former president; and Michele Leftwich, the former head of compliance - were indicted on criminal charges of conspiring to commit securities fraud. Wire-fraud charges were added in August.

The SEC and federal prosecutors alleged the company and its executives deceived other mutual-fund companies by improperly helping big investors carry out thousands of market-timing and late trades in mutual-fund shares.

While many fund companies were caught up in the mutual fund scandal, Mutuals.com's practices were cited by regulators as among the most blatant.

Indeed, starting back in 2001, the SEC alleged that many other mutual fund companies had complained that Mutuals.com was engaging in improper market-timing. By September 2003, around 294 different fund companies had banned or otherwise restricted Mutuals.com from trading in their shares, the SEC said.

One of the complainers was Pershing, which Bank of New York acquired from Credit Suisse Group last year. Pershing told Sapio that Mutuals.com couldn't conduct market-timing trades in funds that had complained.

Despite the complaints, regulators say Mutuals.com found ways to get around the restrictions Pershing placed on them. For instance, the firm's executives were charged with using multiple account numbers for the same client, using affiliated broker dealers to execute trades without disclosing their relationship to Mutuals.com and executing trades through multiple clearing firms.

Pershing said in an e-mail, cited as part of the SEC charges last year, that it was impossible to stop Mutuals.com from market timing because the executives were insistent on circumventing the bans.

"It's not unlike a rock band which knows that they continue to trash hotel rooms on their tours and as soon as Hyatt throws them out, they'll move on to Hilton, then Marriott, then somebody else," a Pershing executive wrote.

A Bank of New York spokesman declined to comment beyond what the bank disclosed in its SEC filing Tuesday.

Bank of New York shares closed the day at $32.74, down 99 cents, or 2.9 percent, on the New York Stock Exchange.