Risk & Compliance

SEC, Banc of America Securities Settle

In the conclusion of a case reminiscent of the Spitzer era, the investment bank will cough up $26 million.
Sarah JohnsonMarch 14, 2007

In the latest of a number of Securities and Exchange Commission insider-trading actions, the SEC settled an enforcement action with Banc of America Securities in which BAS will pay $26 million in disgorgement and penalties. The commission had charged that the company with not safeguarding the release of its nonpublic analyst reports between 1999 and 2001.

The SEC announced the settlement on Wednesday, less than two weeks after filing cases alleging that 14 individuals and companies were involved in a $15 million insider trading scheme. Those alleged perpetrators used information stolen from UBS Securities and Morgan Stanley & Co., according to the commission. Stamping out illegal insider trading has been one of SEC Chairman Christopher Cox’s priorities.

Indeed, a great deal of insider-trading news has come out of the SEC lately. Among the actions was the commission’s recent announcement that it believes “unknown” individuals bought call options of TXU Corp. ahead of the power company’s $45 billion merger news and took steps to freeze those people’s assets.

SEC spokesman John Nester, however, said that the commission isn’t investigating or enforcing more insider trading cases than it has in the past. “People may have a more heightened awareness of it,” he told CFO.com. About 8 percent to 10 percent of the SEC’s cases are related to insider trading every year, he added.

Besides fining Banc of America Securities, the SEC censured the investment bank and slapped a cease-and-desist order on the firm. BAS also agreed to hire an independent consultant to review its processes for how material nonpublic information is used.

“BAS neither admits nor denies the factual allegations of the order,” Bank of America, the investment bank’s parent company, said in a statement sent to CFO.com. “We believe it is in the best interest of the corporation and our shareholders to settle this matter at this time.”

Current as the case seems, it seemed a throwback to a time when investment banks were brought low by conflict-of-interest charges. The end of the SEC’s investigation came five years after then New York Attorney General Eliot Spitzer forced investment banks to create stronger barriers between their deal-making and research operations.

The SEC claims that BAS’s internal controls over the dissemination of its research reports had a “breakdown” early in the decade. As a result, the firm’s sales and trading employees knew the content of reports before they were made public, such as whether its researchers had upgraded or downgraded a company’s worth, according to the suit. At least twice, the firm’s employees allegedly made trades based on that early information.

Those problems occurred even though BAS had a policy that forthcoming reports should not be shared with anyone outside of its research department, including sales and trading employees, according to the SEC. But the firm allegedly had no policy on what employees who did get their hands on such research should do and didn’t monitor how the information was used. For example, BAS did not track the actual release times for its equity research, the SEC said.

Besides allegedly making it easy for its employees to trade on nonpublic reports, BAS had conflict-of-interest issues, the SEC claims. In late 1999, although the investment bank allegedly was aware that the dividing wall between the researchers and the sales and trading group was weak, it chose not to make any changes, according to the action.

Adding to confusion at BAS was a decision made a few months later to hire a marketing director whose loyalties were split between sales and the research analysts, according to the commission. That person “acted as a liaison between the firm’s sales and research departments and served as a ‘sounding board’ for the firm’s analysts,” the SEC said. On top of that unclear line between business groups, the commission said, the marketing director was one of the most active traders at the firm.

BAS also had situations in which its “investment bankers inappropriately influenced analysts, who were charged with producing objective research,” the SEC said. Three “misleading” research reports on Intel, TelCom Semiconductor, and E-Stamp were published as a result. The reports did not “reflect the true views of the research analyst covering the security,” the SEC said.

This is not the first enforcement action to come out of the SEC’s investigation. In 2004, the SEC fined BAS $10 million for not cooperating. The firm “repeatedly failed to promptly furnish documents requested by the staff, provided misinformation concerning the availability and production status of such documents, and engaged in dilatory tactics that delayed the investigation,” the commission said at the time.