How Bank of America dodged a harsh penalty

McClatchy NewspapersDecember 8, 2009 

WASHINGTON — Although it's been overshadowed by other market collapses, a 2008 scandal over products called "auction rate securities" ensnared several Wall Street firms and tens of thousands of customers nationwide.

Auction rate securities — bonds issued by municipalities, student loan entities and corporations — were sold to retail customers as safe short-term cash accounts, but the market for the securities, while generally stable, can become volatile.

It did so in early 2008, causing the market to freeze and customers to lose access to their money. The Securities and Exchange Commission eventually settled with the firms for improperly selling the securities, and it required them to begin refunding customers' money.

Among the firms implicated was Bank of America, based in Charlotte, N.C. In fact, the company was cited for improper behavior even after the SEC had cut it a break for earlier transgressions.

In 2006, Bank of America and other companies were cited for improperly marketing auction rate securities. The SEC, however, declared it planned to go easier on Bank of America "because of the quality of its self-monitoring capabilities in the auction rate securities area."

Because of that "quality," Bank of America was fined $750,000, half the amount of other banks.

A year later, however, that self-monitoring didn't prevent the bank from getting in trouble again.

This time, the SEC found that Bank of America was touting auction rate securities as a safe and secure way to set aside cash for uses such as college tuition and house down payments.

Even though Bank of America knew by 2007 that its sales pitch was "inaccurate, incomplete and out-of-date," it used "false and misleading" information to sell them to thousands of customers nationwide, the SEC found.

Even after a bank official warned that Wall Street turbulence "could trigger a meltdown" in the auction rate market, the sales continued — and two weeks after the warning the bank held a "teach-in" to sell more of the securities, the SEC said.

Bank of America did warn some of its customers — the ones who were part of a private wealth management division known as U.S. Trust.

The auction rate division didn't warn regular retail customers, however. Instead, it complained about the division for wealthy customers.

"Whoever sent this out should be shot!!" one senior member of the auction rate securities desk wrote, court records show. "Are they trying to put us out of business?"

"I thought we were on the same team," a colleague responded.

In February 2008, the market for auction rate securities failed, leaving customers with billions of dollars in frozen accounts, the SEC said. While not admitting wrongdoing, Bank of America settled with the SEC, unfreezing much of the money, although some customers still haven't gotten their money back, according to a civil lawsuit filed against the bank.

In June 2009, the bank filed for what is known as a Section 9(c) waiver from the SEC, which would spare its mutual fund division from harsh penalties called for in the law. While people inside Bank of America may have thought that "we were on the same team," from a legal perspective, Bank of America said the auction rate division was separate from the mutual fund division and shouldn't affect it.

Citing the "limited scope and impact of the alleged misconduct," the bank said the alleged violations "did not in any way involve" the company's mutual fund operations that could be penalized.

"When Section 9 was adopted, investment companies were typically managed by relatively small partnerships," Bank of America said. The law "could not have been intended" to punish a major firm such as Bank of America.

The SEC granted the waiver.

Bank of America said it doesn't comment on its communications with regulators.

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McClatchy Newspapers 2009

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