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NationsBank settles charges
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May 4, 1998: 3:23 p.m. ET
Bank, broker unit to pay $6.75M fine for misleading investors on fund risks
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NEW YORK (CNNfn) - NationsBank N.A. and a broker affiliate agreed Monday to pay $6.75 million to settle charges they misled cautious investors about the risk of two bond funds they bought.
The Charlotte, N.C.-based bank and NationsSecurities Inc., its affiliated broker-dealer, faced charges of blurring the distinction between federally-insured bond funds and two uninsured closed-end bond funds known as "term trusts" sold by the broker's agents.
As part of the settlement, NationsSecurities agreed to pay $4 million to settle charges from the Securities and Exchange Commission and $2 million in an action brought by the National Association of Securities Dealers Regulation, Inc., the regulatory arm of the NASD.
NationsBank also agreed to pay $750,000 to settle charges by the Office of the Comptroller of the Currency that involved the marketing and sale of investment products on bank premises.
The allegations came to light in 1994.
The bond funds were comprised of some traditional government securities but also contained high-risk derivative elements that were subject to swings in interest rates.
"And when interest rates kicked up that year, in 1994, the investments came crashing down," said Paul Gerlach, an associate director with the SEC's enforcement division.
NationsSecurities agents reached customers by setting up in many of NationsBank's 2,000 branches and by sending out mailings to bank customers, Gerlach said.
According to the SEC order, broker representatives were instructed to "make every effort to blend into the bank and 'to become a face at the bank'."
And NationsSecurities representatives were instructed by superiors to tell customers that the term trusts were government-backed and that NationsBank would not let its customers lose their principal.
NationsSecurities agents also targeted customers who had invested in certificates of deposit, telling the investors they had a higher return with the term trusts with no more risk.
More than 80 percent of the 13,000 investors involved earned less than $50,000 a year and most were over 60 years of age.
Regulators also said bank employees were eligible for incentives if they referred customers to NationsSecurities.
A NationsBank spokesperson wasn't available for comment Monday. NationsBank shares (NB) were off 9/16 at 77-5/8 in New York Stock Exchange trading Monday afternoon. 
-- by staff writer Jamey Keaten
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