CHICAGO -- Bank One Corp. agreed yesterday on the eve of its final day as an independent company to settle regulators' allegations that it allowed a hedge fund to make improper mutual fund trades.
The $50 million settlement was disclosed by the Securities and Exchange Commission and New York Attorney General Eliot Spitzer, which had jointly made the allegations of improper market timing involving Bank One's mutual funds unit.
Under the terms of the settlement, its Banc One Investment Advisors Corp. unit agreed to pay $10 million in restitution and $40 million in civil penalties. It also will reduce the fees it charges investors by $8 million annually over a five-year period.
Mark Beeson, the 46-year-old former president and chief executive of the company's One Group mutual funds, was ordered by the SEC to pay a civil penalty of $100,000 and barred from the mutual fund industry for three years.
The SEC said Beeson and the Banc One unit violated federal securities laws by allowing hedge-fund manager Edward J. Stern to engage in "excessive" short-term trading, which increased Banc One's fees. In addition, Banc One failed to charge Stern redemption fees as required and improperly provided him with confidential portfolio holdings.
Stern gained approximately $5.2 million from 300 transactions executed within One Group funds between June 2002 and May 2003, which the SEC said Banc One allowed in the hope it would lead to additional business from Stern.
Stephen Cutler, director of the SEC's enforcement division, said that by allowing Stern to do market timing and receive confidential information, Banc One and Beeson "blatantly disregarded the well-being of One Group funds' long-term shareholders."
"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," he said.
The agreement also includes compliance and mutual-fund governance reforms at Banc One, which is based in Columbus, Ohio, and has over $100 billion in assets.
The settlement came just before the merger of Chicago-based Bank One with New York-based J.P. Morgan Chase & Co., which takes effect tomorrow.
Dozens of fund companies have been subpoenaed by the SEC, the states of Massachusetts and New York, and other regulators amid reports of widespread improper trading. A handful agreed to multimillion-dollar settlements to resolve accusations of wrongdoing, including Alliance Capital Management and Bank of America.
Market timing, a type of quick, in-and-out-trading, is not illegal but is prohibited by many funds because it tends to skim profits from long-term shareholders. Regulators say funds that allowed selective market timing committed fraud.
The market timing within Banc One funds was discovered during Spitzer's investigation last summer of hedge fund Canary Capital Partners LLC.
Bank One share rose 41 cents to close at $50.42 on the New York Stock Exchange, before the settlement announcement.