Banking

Penalties against BofA, Wachovia exceed $1 billion

Several million here, tens of millions there, and pretty soon it starts to add up.

Over the past five years, Charlotte's two big banks have agreed to pay more than $1 billion in fines, restitution and reduced fees as part of various regulatory settlements, according to an Observer analysis.

The total eclipsed the $1 billion mark after two recent run-ins with regulators. In April, Wachovia reached a settlement of up to $144 million over its ties with telemarketers. Last month, Bank of America agreed to pay nearly $10 million for allegedly charging improper fees on certain accounts.

Bank of America racked up about three-fourths of the total since 2004, largely because of a $675 million mutual fund settlement finalized in 2005. That amount included restitution, penalties and an ordered reduction of fees for alleged transgressions at Bank of America and FleetBoston Financial, which the Charlotte bank acquired in 2004.

Experts say the banks' burgeoning regulatory bill was a sign of increased scrutiny of corporate America after a rash of scandals early in the decade. They also said it's evidence of the difficulty of managing ever-growing banking conglomerates.

“Part of what's going on is banks are bigger and more difficult to manage,” said Robert Hillman, a professor of law at the University of California Davis. “One of the real challenges of a bank or any financial institution is to make sure it has the financial and management controls that work.”

The fines, of course, also are the result of employees being accused of breaking rules in the quest for more business, bigger profits or personal gain. In the wake of investigations, the banks have fired workers and enhanced ethics policies.

While Bank of America accounted for most of the $1.01 billion total, Wachovia tallied eight of the 15 regulatory settlements. The Observer analysis did not count settlements below $2 million or payouts from lawsuits filed by investors or other plaintiffs.

The Securities and Exchange Commission, which regulates the brokerage and mutual fund business as well as practices by public companies, was the primary collector. Other regulators included the Office of the Comptroller of the Currency, the National Association of Securities Dealers (now known as the Financial Industry Regulatory Authority) and the Internal Revenue Service.

In comparison, the SEC meted out a total of $11.9 billion in fines and restitution from fiscal 2004 to fiscal 2007. The $1 billion total amounts to a little more than 1 percent of the more than $92 billion in profits both banks accumulated from 2004 to 2007.

Regulatory actions have given the banks negative headlines and provided dark moments for their chief executives. Typically, the settlements allow companies to resolve the allegations against them without acknowledging specific wrongdoing. Often, the enforcement actions have led to changed business practices at the banks and in the industry.

The restitution paid is earmarked for harmed investors or shareholders. The penalties are designed to punish.

Bank of America spokesman Bob Stickler noted that most of the bank's payout was the result of the mutual fund probe. “We have made a lot of changes in that area,” he said. “We have moved forward.”

Wachovia spokeswoman Christy Phillips-Brown said the fines are “related to old issues, which have been corrected.”

Mutual fund missteps costly

The settlements covered a gamut of alleged wrongdoing, from Bank of America's delay in providing documents during an investigation to Wachovia's failure to pass along brokerage discounts to customers. The punishments have ranged from the relatively small ($2 million) to some of the biggest ever levied.

The $515 million that Bank of America and FleetBoston paid to settle allegations of improper mutual fund trading (not counting the $160 million in reduced fees) appears to be the most severe in the probe of the mutual fund industry sparked by then New York Attorney General Eliot Spitzer in 2003. But the bank was among a host of financial institutions, including Wachovia, ultimately caught up in a broad investigation that targeted trading practices that benefited favored investors over mom-and-pop investors.

In comparison, the biggest SEC settlement in the past five years was the $800 million in restitution and penalties coughed up by insurer American International Group over allegations of improper accounting and other improprieties. Other big offenders were telecommunications firm WorldCom ($750 million) and mortgage giant Fannie Mae ($400 million). Both faced allegations of improper accounting practices.

Bank of America and Wachovia largely steered clear of a major blowup in 2003 that snagged many other financial institutions: the $1.4 billion global settlement over allegedly biased analyst reports. Both banks, however, were later snared in other investigations involving analyst research.

Wachovia's $144 million settlement with the OCC in April was the second biggest ever by the regulator of national banks. In its investigation, the OCC found that telemarketers and payment processors obtained bank account information from largely elderly customers and withdrew money from their accounts. The bank profited from fees tied to accounts the telemarketers and processors kept at Wachovia.

The OCC levied its biggest punishment in 2000 against credit card issuer Providian Financial, now owned by Washington Mutual, securing around $300 million in restitution over unfair and deceptive practices.

The banks' surge in payouts coincides with post-Enron scrutiny of corporate wrongdoing and a widespread probe of the mutual fund industry that began in late 2003. Before 2004, a search of news archives found only relatively small settlements involving the banks.

From 1992 to 2001, before Congress passed the Sarbanes-Oxley corporate governance law, the SEC's annual total for penalties and restitution averaged $580.8 million. That grew to an average of $2.5 billion from 2002 to 2007.

“I'm not sure there's been a lot more (wrongdoing),” Hillman, the UC Davis professor, said of the increase in fines. “There's been a lot more of a light being shone on it.”

Expansion ups vulnerability

Financial institutions have run into more problems as they increasingly expand beyond their commercial banking roots, said James Cox, law professor at Duke University. With the lowering of regulatory barriers, Bank of America and Wachovia have moved into investment banking and the brokerage business, a source of many of the fines.

This expansion can result in conflicts of interest between various business units, Cox said.

That was an issue, for example, in Bank of America's settlement last month with the SEC. The agency said the bank failed to disclose to clients that it was assigning its own mutual funds to investors in certain fee-based accounts instead of giving them other choices.

“We need more firewalls,” Cox said.

Many of the settlements involving the banks have called for improved compliance practices and other corrective actions. After its mutual fund run-in, Bank of America hired outside parties to analyze its internal policies and practices. Wachovia said in May it would tap a third party to analyze its controls after a spate of missteps.

Cox said he favors enforcement actions to punish wrongdoing, but has grown more cynical about their impact as a deterrent. “What we need,” he said, “is good, strong regulators who demand good, strong internal controls.”

Several million here, tens of millions there, and pretty soon it starts to add up.

Over the past five years, Charlotte's two big banks have agreed to pay more than $1 billion in fines, restitution and reduced fees as part of various regulatory settlements, according to an Observer analysis.

The total eclipsed the $1 billion mark after two recent run-ins with regulators. In April, Wachovia reached a settlement of up to $144 million over its ties with telemarketers. Last month, Bank of America agreed to pay nearly $10 million for allegedly charging improper fees on certain accounts.

Bank of America racked up about three-fourths of the total since 2004, largely because of a $675 million mutual fund settlement finalized in 2005. That amount included restitution, penalties and an ordered reduction of fees for alleged transgressions at Bank of America and FleetBoston Financial, which the Charlotte bank acquired in 2004.

Experts say the banks' burgeoning regulatory bill was a sign of increased scrutiny of corporate America after a rash of scandals early in the decade. They also said it's evidence of the difficulty of managing ever-growing banking conglomerates.

“Part of what's going on is banks are bigger and more difficult to manage,” said Robert Hillman, a professor of law at the University of California Davis. “One of the real challenges of a bank or any financial institution is to make sure it has the financial and management controls that work.”

The fines, of course, also are the result of employees being accused of breaking rules in the quest for more business, bigger profits or personal gain. In the wake of investigations, the banks have fired workers and enhanced ethics policies.

While Bank of America accounted for most of the $1.01 billion total, Wachovia tallied eight of the 15 regulatory settlements. The Observer analysis did not count settlements below $2 million or payouts from lawsuits filed by investors or other plaintiffs.

The Securities and Exchange Commission, which regulates the brokerage and mutual fund business as well as practices by public companies, was the primary collector. Other regulators included the Office of the Comptroller of the Currency, the National Association of Securities Dealers (now known as the Financial Industry Regulatory Authority) and the Internal Revenue Service.

In comparison, the SEC meted out a total of $11.9 billion in fines and restitution from fiscal 2004 to fiscal 2007. The $1 billion total amounts to a little more than 1 percent of the more than $92 billion in profits both banks accumulated from 2004 to 2007.

Regulatory actions have given the banks negative headlines and provided dark moments for their chief executives. Typically, the settlements allow companies to resolve the allegations against them without acknowledging specific wrongdoing. Often, the enforcement actions have led to changed business practices at the banks and in the industry.

The restitution paid is earmarked for harmed investors or shareholders. The penalties are designed to punish.

Bank of America spokesman Bob Stickler noted that most of the bank's payout was the result of the mutual fund probe. “We have made a lot of changes in that area,” he said. “We have moved forward.”

Wachovia spokeswoman Christy Phillips-Brown said the fines are “related to old issues, which have been corrected.”

Mutual fund missteps costly

The settlements covered a gamut of alleged wrongdoing, from Bank of America's delay in providing documents during an investigation to Wachovia's failure to pass along brokerage discounts to customers. The punishments have ranged from the relatively small ($2 million) to some of the biggest ever levied.

The $515 million that Bank of America and FleetBoston paid to settle allegations of improper mutual fund trading (not counting the $160 million in reduced fees) appears to be the most severe in the probe of the mutual fund industry sparked by then New York Attorney General Eliot Spitzer in 2003. But the bank was among a host of financial institutions, including Wachovia, ultimately caught up in a broad investigation that targeted trading practices that benefited favored investors over mom-and-pop investors.

In comparison, the biggest SEC settlement in the past five years was the $800 million in restitution and penalties coughed up by insurer American International Group over allegations of improper accounting and other improprieties. Other big offenders were telecommunications firm WorldCom ($750 million) and mortgage giant Fannie Mae ($400 million). Both faced allegations of improper accounting practices.

Bank of America and Wachovia largely steered clear of a major blowup in 2003 that snagged many other financial institutions: the $1.4 billion global settlement over allegedly biased analyst reports. Both banks, however, were later snared in other investigations involving analyst research.

Wachovia's $144 million settlement with the OCC in April was the second biggest ever by the regulator of national banks. In its investigation, the OCC found that telemarketers and payment processors obtained bank account information from largely elderly customers and withdrew money from their accounts. The bank profited from fees tied to accounts the telemarketers and processors kept at Wachovia.

The OCC levied its biggest punishment in 2000 against credit card issuer Providian Financial, now owned by Washington Mutual, securing around $300 million in restitution over unfair and deceptive practices.

The banks' surge in payouts coincides with post-Enron scrutiny of corporate wrongdoing and a widespread probe of the mutual fund industry that began in late 2003. Before 2004, a search of news archives found only relatively small settlements involving the banks.

From 1992 to 2001, before Congress passed the Sarbanes-Oxley corporate governance law, the SEC's annual total for penalties and restitution averaged $580.8 million. That grew to an average of $2.5 billion from 2002 to 2007.

“I'm not sure there's been a lot more (wrongdoing),” Hillman, the UC Davis professor, said of the increase in fines. “There's been a lot more of a light being shone on it.”

Expansion ups vulnerability

Financial institutions have run into more problems as they increasingly expand beyond their commercial banking roots, said James Cox, law professor at Duke University. With the lowering of regulatory barriers, Bank of America and Wachovia have moved into investment banking and the brokerage business, a source of many of the fines.

This expansion can result in conflicts of interest between various business units, Cox said.

That was an issue, for example, in Bank of America's settlement last month with the SEC. The agency said the bank failed to disclose to clients that it was assigning its own mutual funds to investors in certain fee-based accounts instead of giving them other choices.

“We need more firewalls,” Cox said.

Many of the settlements involving the banks have called for improved compliance practices and other corrective actions. After its mutual fund run-in, Bank of America hired outside parties to analyze its internal policies and practices. Wachovia said in May it would tap a third party to analyze its controls after a spate of missteps.

Cox said he favors enforcement actions to punish wrongdoing, but has grown more cynical about their impact as a deterrent. “What we need,” he said, “is good, strong regulators who demand good, strong internal controls.”

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