Bank One Corp. agreed Tuesday to pay $50 million in fines and restitution to state and federal regulators to settle allegations that its One Group mutual funds gave rich clients secret portfolio information and allowed them to profit from short-term trades that cut into profits for ordinary investors.
Under an agreement with the Securities and Exchange Commission and New York regulators, Banc One Investment Advisors, a unit of Bank One, will pay $10 million in restitution and $40 million in civil penalties for cutting secret deals with a New Jersey hedge fund and other investors who engaged in market timing, a kind of predatory trading that tries to exploit differences between mutual fund prices and the value of their underlying assets.
Columbus, Ohio-based One Group funds, which manage $103 billion in 49 mutual funds, also agreed to cut future fees for customers by $40 million over five years. The former president of One Group, Mark Beeson, will pay an additional $100,000 and be barred from the securities industry for two years. The money will be distributed to the firm's mutual fund shareholders.
Bank One, the nation's sixth-largest bank, profited from the arrangement in a couple of ways -- sale and management fees on the timers' money when it was invested in the mutual funds and by the interest it got from lending money to investors who then used the funds to engage in market timing, regulators said.
The deal comes at a crucial time for Bank One, which had been pressuring regulators to conclude their investigation before its purchase by J.P. Morgan Chase is scheduled to close tomorrow.
Bank One was one of the first firms to be implicated in the current mutual fund scandal. Last September, New York state Attorney General Eliot L. Spitzer alleged that it was one of four fund companies that had cut improper deals with Canary Capital Management in New Jersey. Since then, the scandal has engulfed more than a dozen firms, which have paid more than $2.3 billion to end investigations into improper trading.
Regulators alleged that Bank One officials not only waived $4 million in redemption fees for Canary manager Edward J. Stern Jr., but also made it easier for him to engage in market timing by giving him information about their funds' holdings that was not available to ordinary investors. Such data gave Stern, who settled earlier with Spitzer for $40 million, an edge in determining when the funds' prices were most likely to be out of sync with their actual values, officials said.
Stern made a profit of about $5.2 million from about 300 trades in 2002 and 2003, the SEC said.
Nor was Stern the only market timer to cut a deal with Bank One, the SEC said. A Texas hedge fund and a Michigan market timer were also using the One Group funds for short-term trading.
"By allowing Stern to market time in One Group funds, and by providing him with information about the funds' confidential portfolio holdings, Banc One and Mark Beeson blatantly disregarded the well-being of One Group funds' long-term shareholders," SEC enforcement director Stephen M. Cutler said in a prepared statement. "Today's sanctions show that the Commission continues to aggressively pursue mutual-fund advisers -- and their senior management -- when they place their own interests above those of fund investors."
As is customary, Bank One, which is headquartered in Chicago, neither admitted nor denied wrongdoing.
"Soon after we first learned of these investigations, we committed to cooperate with regulators, make restitution to shareholders, and review and change our policies, as appropriate," David J. Kundert, chairman and chief executive of the firm's mutual fund management arm, said in a statement. "Strong procedures are now in place to further protect the interests of our mutual fund shareholders and prevent a recurrence of similar issues in the future."
While market timing is not illegal, Bank One fell broke the rules, regulators said, by telling investors that it did not allow such short-term trading while allowing Canary free rein. "This case sends the message that mutual-fund advisers cannot tell investors one thing and then do another. One Group's prospectuses clearly forbade market timing -- but [Bank One] and Beeson allowed it anyway," Robert J. Burson, senior associate regional director of the SEC's Midwest Regional Office, said in a written statement.
Although the market timing scandal appears to be winding down, both Spitzer's office and the SEC still have a number of open investigations into firms that profited from allowing hedge funds and other big investors to engage in trading that hurt long-term investors. The largest publicly known case that is still outstanding involves Invesco Funds Group. Invesco's parent company has said it is seeking to negotiate a settlement.
"As this latest settlement demonstrates, we remain committed to restoring soundness to the marketplace. We will continue to pursue mutual fund companies who put their own interests before the interests of investors," Spitzer said.