NEW YORK/WASHINGTON The U.S. Department of Justice and the Commodity Futures Trading Commission have both held investigations into whether Bank of America (BAC.N) engaged in improper trading by doing its own futures trades ahead of executing large orders for clients, according to a regulatory filing.
The June 2013 disclosure, which Reuters recently reviewed on a website run by the securities industry regulator FINRA, sheds light on the basis for a warning by the Federal Bureau of Investigation on January 8.
The warning, in the form of an intelligence bulletin to regulators and security officers at financial services firms, said that the FBI suspected swaps traders at an unnamed U.S. bank and an unnamed Canadian bank may have been involved in market manipulation and front running of orders from U.S. government-owned mortgage giants Fannie Mae FNMA.OB and Freddie Mac FMCC.OB.
Reuters has since learned that Bank of America's trading practices regarding Fannie and Freddie are the subject of probes, and that the investigations are ongoing.
Bank of America spokesman Bill Halldin declined comment when asked abut the investigations.
The disclosure on the FINRA site doesn't specifically accuse Bank of America of any wrongdoing.
It says: "We understand that the (U.S. Attorney's Office) is investigating whether it was proper for the swaps desk to execute futures trades prior to the desk's execution of block future trades on behalf of counterparties."
The filing, which identifies the U.S. Attorney's Office in Charlotte, North Carolina, where Bank of America is based, adds: "We also understand that the Commodity Futures Trading Commission is conducting a parallel investigation into the trading issue."
The filing cites the bank as the source of the information.
The disclosure is in a FINRA "BrokerCheck" report on Eric Beckwith, a former managing director at Bank of America's Merrill Lynch broker-dealer division in New York. BrokerCheck is an online system that allows investors to check the backgrounds of brokers for any regulatory issues or malpractice.
Representatives from the CFTC, and the U.S. Attorney's office in Charlotte declined comment.
The filing said investigators are also looking into whether Beckwith gave accurate information to the CME Group's Chicago Mercantile Exchange in connection with an investigation by the exchange into the trading.
Halldin said Beckwith left the firm in July.
Beckwith could not be reached for comment. The CME declined to comment.
Front running occurs when someone with advance knowledge of another market participant's plan to make a sizable transaction puts an order in first, often profiting from a market move that can occur once the big trade has gone through. It is a concern for many regulators as it pushes up the cost of trades entered into by investors, including pension funds and governments.
In the bulletin, the FBI warned of "unsophisticated tradecraft" such as hand signals or special ring tones that traders were using to deliver information about impending orders in the interest-rate swaps market.
The document also said that the inspector general's office of the Federal Housing Finance Agency, the regulator of Fannie Mae FNMA.OB and Freddie Mac FMCC.OB, is looking into the matter.
Representatives for Fannie Mae and Freddie Mac declined to comment.
(Reporting by Karen Brettell in New York and Aruna Viswanatha in Washington, Editing by Karey Van Hall and Martin Howell)