Our Bank Of America - Probed For Front Running

| About: Bank of (BAC)

My Bank of America (NYSE:BAC), where I have several accounts in Naples, FL., is under investigation by both the Department of Justice and the Commodity Futures Trading Commission for questionable trading practices. The bank is suspected of putting in its own trades before executing clients' large orders, a practice known as front running.

By definition, front running is the illegal use of advanced knowledge of a market for personal gain. Traders engaged in front running might foresee a client's sizable transaction and attempt to profit from the related, impending market move by putting their own orders first. This is a nightmare for regulators as it manipulates rates on large orders, creating an unfair advantage for the traders, who initiate these trades, while simultaneously raising the cost for other investors, many of whom happen to be government agencies and pension funds.

The Federal Bureau of Investigations (FBI) is currently investigating if Bank of America is using front running ahead of large client orders from Fannie Mae (OTCQB:FNMA), Freddie Mac (OTCQB:FMCC), and Government Sponsored Enterprises (frequently called GSEs).

In addition, this does not look like the work of "rogue" traders- traders who follow their own discretion without the interests of the financial institution they are representing. An FBI bulletin disclosed that the Bureau has reason to believe the current BAC case was planned ahead of time by senior management. Executives may have encouraged unethical means to achieve higher revenues.

According to the FBI bulletin, such transactions are often conducted by using special signals-hand gestures or mobile ring tones-to deliver a message about upcoming orders in the market for interest-rate swaps.

Although this is breaking news in the financial press, first disclosed by Reuters, these probes date as far back as June 2013, when an FBI intelligence bulletin discussed its investigation of traders who represented two large banks, interested in manipulating major orders related to Fannie Mae, Freddie Mac, and GSEs. The June 2013 intelligence bulletin reviewed by Reuters was posted on FINRA, a security industry regulator website, first to serve as a warning for regulators and financial services security officers. The FINRA report did not initially name the banks involved in manipulating swap trades-merely mentioned that one was a US bank and the other a Canadian one. It was only later that Reuters learned of the FBI probe into BAC trading practices, in relationship to Fannie Mae and Freddie Mac.

The FINRA website also has a "BrokerCheck" report on a former manager at BAC's broker division at Merrill Lynch in New York, Eric Beckwith. (BrokerCheck is an online resource for investors to do a background check on brokers for malpractice.) The piece explores whether Beckwith provided the Chicago Mercantile Exchange accurate information.

Currently, everyone involved is declining comment. This includes the U.S. Attorney General's office in Charlotte, North Carolina, the city for the headquarters of Bank of America; the Commodity Futures Trading Commission (the CFTC); the Chicago Mercantile Exchange (NASDAQ:CME), and Fannie Mae and Freddie Mac spokespeople. Additionally, Bill Halldin, the Bank of America spokesman, declined comment about the investigations and Beckwith, who left Merrill Lynch in July, could not be reached.

Unfortunately, even if investigations lead to the conclusion that Bank of America was involved in front running, it will be difficult to prosecute those at fault because the actual transactions were legitimate.

What Should BAC Shareholders Consider?

This investigation is another black mark against this mega bank.

Despite its perceived riches, BAC has missed revenue estimates in four out of the past six quarters, including the most recent quarter. These revenue shortfalls are not a good sign for shareholders.

BAC has not increased dividends for five years; in fact, after slashing dividends in half in 2008 ($.64 to $.32), BAC all but took them away entirely at the end of 2008, lowering the payout to $.01, where it has remained since, despite significant increases in BAC revenue in the past half-decade.

The current selloff in the emerging markets around the world and the January market correction will also be a negative for Merrill Lynch revenues which BAC now relies on for a big part of their profits.

We believe that investors should consider taking profits in our Bank of America until the board of directors and senior management takes steps to improve the compliance efforts at this financial institution and re-focuses their efforts on increasing shareholder value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.