Bank of America fined record $10m

Bank of America Corp. was hit with a record $10 million fine and censured yesterday by the US Securities and Exchange Commission for misleading regulators and stalling on producing evidence in an investigation of improper trading by employees at its securities brokerage.

The SEC case adds to the regulatory woes already faced by Bank of America and its acquisition target, FleetBoston Financial Corp., both of which have been separately implicated in the market-timing scandal ripping through the mutual fund industry. When its planned takeover of Fleet is complete next month, Bank of America will be the largest financial institution in New England and the third-largest bank in the country.

According to the SEC complaint, Banc of America Securities LLC and its lawyers simply did not turn over documents for months at a time, said some were ''missing" when they weren't, and ''engaged in dilatory tactics that delayed the investigation."

In one series of events, the firm complained it would be too much work to produce certain archived e-mails, when the SEC alleged that the company already recovered some of them for its own defense, and then deleted the e-mail exchanges from the firm's computer system.

Moreover, other documents sought by the SEC were destroyed one week after regulators asked the company to produce them. The securities firm told investigators the destruction of those documents was ''inadvertent."

All told, the SEC said it took nearly two years for the company to produce the documents.

''We view this as serious misconduct," said SEC enforcement chief Stephen Cutler, who said the fine was the largest the agency has ever levied in a case involving a company's failure to produce documents in an investigation. ''This case should tell those who are responding to government subpoenas and document requests that there are severe consequences when the integrity of the process isn't respected. This is in many ways a textbook example of how not to deal with the government in an investigation."

Legal specialists said they were struck both by the size of the fine and the SEC's hard line in the case, as well as by the behavior of Banc of America Securities as laid out in the government's complaint.

''What a mess," said Joan MacLeod Heminway, a business law professor at the University of Tennessee. ''There are so many specific and detailed representations in this order," she said, that the company and its attorneys at the time ''willfully did not comply with their obligations" to keep and produce records.

In a statement yesterday, Bank of America said it had put in place a series of measures ''designed to improve its ability to respond to this and other regulatory inquiries."

Those include: creating a special unit devoted to identifying and recovering information sought in regulatory investigations; developing new procedures to recover e-mails; strengthening its compliance operations; and in August 2003, changing lawyers.

''The company believes the problems addressed by the SEC in this settlement are isolated, and we continue to look for ways to improve our ability to respond to inquiries such as this," Bank of America's statement concluded. The firm consented to the SEC fine and censure without admitting or denying guilt and bank officials declined to comment further.

While this particular case may be isolated, both Bank of America and Fleet have other legal problems with regulators that remain unresolved or were settled with hefty fines. For one, SEC officials pointedly said they're continuing to investigate the underlying case of improper trading.

In that situation, regulators are trying to determine whether Banc of America Securities' former director of marketing and possibly other employees traded in stocks they knew were going to be the subject of market-moving research reports by the firm's stock analysts. If true, securities attorneys said such ''front-running" of stocks would be a serious violation. Bank of America declined to identify the marketing official or otherwise comment on the matter.

Separately, in December the National Association of Securities Dealers fined a former analyst at the firm, Andrew Hamerling, $125,000 and suspended him for nine months for issuing false research reports about telecommunications companies, and giving advance notice of his forthcoming opinions to the companies concerned.

The Charlotte, N.C., banking giant also remains under investigation by the SEC and New York Attorney General Attorney Eliot Spitzer in the initial market-timing case that has put much of the mutual fund industry under a microscope. In his landmark complaint in September, Spitzer said the New Jersey hedge fund at the heart of the trading scandal, Canary Capital Partners LLC, had ''its most extensive late trading and timing relationship" with Bank of America.

In response, Bank of America dismissed several of the employees implicated in Spitzer's complaint, and after announcing its merger with Fleet in October, said it would place control of the combined banks' money management business in Boston under Fleet executive Brian T. Moynihan.

But Fleet's money management operations were sued by the SEC two weeks ago in what regulators said was one of the more egregious cases of improper behavior among the mutual fund market-timing cases they've investigated so far. And last week Fleet disclosed that its New York Stock Exchange floor trading firm would pay nearly $60 million to settle regulators charges it traded stocks ahead of customers' orders.

''When you have a merger of two companies, both of which are accused of serious misconduct, you need to wonder what kind of ethics the resulting entity is going to have," said David Marder, an attorney at Robins, Kaplan, Miller & Ciresi LLP in Boston and a former SEC enforcement official.

Fleet spokesman James Mahoney said in the various cases both companies ''demonstrated strong proactive ethical interventions, and worked closely with regulators to ferret out problems and disciplined those responsible."

The SEC said it also is continuing to investigate the incidents of witholding evidence, separate from the underlying trading case, and will consider whether individuals involved should face charges. Legal specialists said they would be surprised if the agency did not go after the lawyers involved, who worked at the now-defunct firm of Solomon, Zauderer, Ellenhorn, Frischer & Sharp. Several former lawyers from the firm identified Richard Sharp as partner in charge of the Banc of America Securities account. Sharp, now at Milbank, Tweed, Hadley & McCloy LLP in New York, did not return calls seeking comment.

Andrew Caffrey can be reached at caffrey@globe.com.