“Just weeks after paying a big fine for its financial dealings with the Enron Corporation, the Canadian Imperial Bank of Commerce faces imminent regulatory action for providing more than $1 billion in financing to investors who made illegal mutual fund trades, according to people briefed on the inquiry,” writes Riva Atlas in today’s New York Times.

“The New York attorney general, Eliot Spitzer, and the Securities and Exchange Commission are considering filing suits within a couple of weeks against Canadian Imperial for arranging these financings, people briefed on the investigation said. The regulators could also file suit against senior executives who were aware of the activity, they said. “

“Through the financing, the bank helped hedge funds make far bigger bets in mutual fund shares, primarily though the use of derivatives. In some cases, the bank financed trades made after stock trading had closed but at an earlier price, according to those briefed on the investigation. The practice, known as late-day trading, is illegal.”

“A spokesman for Canadian Imperial Bank of Commerce declined to comment on the regulators’ inquiry, other than to confirm that the bank was cooperating with the investigation. “

“Just last month, Canadian Imperial reached an $80 million settlement with the S.E.C. over financings that it arranged for Enron. Those deals allowed Enron to hide debt and inflate its profit by more than $1 billion and its operating cash flow by almost $2 billion, according to the settlement.”

“In the mutual fund investigation, the activities in question probably produced relatively small profits. The financings being examined by regulators would have yielded a few million dollars in fees, estimated Frank Partnoy, a law professor at the University of San Diego and a former Wall Street trader. ‘They couldn’t possibly have made enough money to have made it worth it,’ he said.”

“Other companies under investigation for their role in improper fund trading have also said that their gains from such activities were small. Janus, for example, has said that it will return $32 million to investors in its funds to compensate them for improper trading.”

“In the case of Canadian Imperial, the bank may have been eager to bolster its investment bank in the United States, said one person briefed on the investigation. For years a bit player, it made some headway in the 1990’s in junk bonds and other specialized financings.”

“The bank became involved in the fund financing at the request of a broker at Oppenheimer & Company, which it owned for about five years before selling a majority stake in the firm a year ago, this person said.”

“The bank has said little since the regulators’ interest was disclosed about two and a half weeks ago. But it has quietly stopped financing short-term mutual fund trades by hedge funds, according to a person briefed on the bank’s activities. It has also forced out several executives in New York, according to people who know them.”

“Two traders, Paul Flynn and Jeff Haas, were quietly asked to leave in December, after the bank learned that they had been contacted by regulators, these people said. Their departures were previously reported by TheStreet.com.”

“Keith Wellner, a lawyer who sat near the two men on the trading desk and reviewed the financings, has also left, they said. Robert Deutsch, a managing director who supervised the two traders, has since left. ‘Deutsch sat right next to them,’ said Michael Lubin, a former trader at the bank, referring to Mr. Flynn and Mr. Haas.”