Bank One Corp. said this week it expects to be the subject of an enforcement action by regulators investigating trading abuses in the mutual fund industry.
David Kundert, president of the Chicago bank’s One Group Mutual Funds unit, which oversees more than $101 billion in assets, disclosed the likelihood of regulatory penalties in a message sent to employees late Wednesday. Kundert did not provide detailed information on possible charges and instead focused on the possibility of settling with regulators.
“We are optimistic we can avoid regulatory litigation and reach an amicable resolution with the regulators over the next several months,” he wrote.
Bank One was one of the first names to surface in the rapidly expanding mutual fund probe. When New York state Attorney General Eliot L. Spitzer settled charges against the hedge fund Canary Capital Partners for illegal after-hours trading on Sept. 3, he said Bank One and three other mutual fund firms had cut special deals with Canary to allow the trades.
Wednesday, Bank One rolled out several new policies approved by the One Group board of directors. They include the hiring of a new compliance officer, increased training for employees, more information about fund managers’ salaries, and changes in how research fees are negotiated, paid and disclosed to investors.
A spokesman for Spitzer declined to comment Wednesday, as did a spokesman for the Securities and Exchange Commission.
Sources familiar with the investigation said a complaint or settlement with Bank One is not imminent.
Last month two executives who allegedly gave special trading advantages to Canary Capital left Bank One.
On Tuesday, Federated Investors Inc., a Pittsburgh money-management firm that oversees $201 billion in assets, said an internal investigation uncovered evidence that employees had processed orders for improper short-term and late trades.
Federated said that it accepted the resignations of two employees who allegedly helped hedge funds engage in market timing and fired another worker who deleted e-mail messages related to the investigation. The company said in a news release that “it has found no evidence” that its senior executives were involved in wrongdoing.
“We understand that this industry-wide investigation has raised serious concerns about mutual fund practices and we will continue to cooperate fully with regulators,” Federated chief executive J. Christopher Donahue said in a letter to shareholders posted on the company’s Web site late Tuesday. “Federated is committed to taking remedial actions when and as appropriate, including compensating the funds for any detrimental impact these transactions may have had on them.”
Federated said last month in securities filings that it had been contacted by Spitzer, the SEC and NASD in connection with their wide-ranging investigations of mutual fund practices.
The results of the internal Federated probe, which were reported in Wednesday’s editions of The Wall Street Journal, center on two practices under increasing scrutiny from investors and regulators.
Late trading, which is illegal, occurs when mutual fund orders placed after 4 p.m. trade at the same day’s price instead of the following day’s, as required by law. Federated said it had turned up evidence that one customer, Sugar Land, Texas, hedge fund Veras Investment Partners, had made late trades by phone at least 15 times. The firm said the trades were processed by employees “who did not have a sufficient understanding” of the trading rules and did not intend to break the law. A spokesman for Veras Partners did not return calls Wednesday.
Market timing — frequent trading by short-term investors sometimes hoping to exploit fund share prices that lag behind the value of the underlying securities — is not illegal. But many mutual funds discourage the practice because it can drive up costs and reduce profits available to other shareholders.