CIBC has agreed to pay US$125 million in restitution and penalties to settle charges against a couple of its subsidiaries for their role in the mutual fund market timing scandal.

New York state attorney general Eliot Spitzer’s office announced today that, under the agreement, CIBC will pay US$100 million in restitution to injured investors and US$25 million in civil penalties. CIBC has also adopted a series of reforms.

The settlement was reached in conjunction with the US Securities and Exchange Commission which announced a parallel settlement today.

In announcing its settled administrative proceeding, the SEC found that CIBC subsidiaries, CIBC World Markets Corp. and Canadian Imperial Holdings Inc., engaged in three types of conduct that violated the federal securities laws: Canadian Imperial Holdings financed hedge fund customers knowing the hedge funds would use the leverage to late trade and deceptively market time mutual funds; Canadian Imperial Holdings provided, and World Markets arranged, improper financing for market timing hedge fund customers in violation of the margin and extension of credit requirements; and, a team of World Markets registered reps enabled numerous customers to late trade and deceptively market time mutual funds.

The order finds that Canadian Imperial Holdings provided funds to at least two hedge fund customers knowing those hedge funds would use the leverage to late trade and market time. “By leveraging these entities while knowing they were engaged in deceptive market timing and late trading, Canadian Imperial Holdings participated in a scheme to defraud mutual funds and their long term shareholders, thus violating the antifraud provisions of the federal securities laws,” the SEC says.

It also finds that Canadian Imperial Holdings violated the margin regulations. And, that from at least 1999 until January 2003, World Markets engaged in widespread deceptive market timing and late trading through a team of brokers who used, among other tactics, multiple accounts, multiple RR numbers, and small trade size broken up across related accounts to deceive mutual funds and “stay under the radar” of the mutual funds’ internal timing monitors.

The SEC adds that senior officials at World Markets knew about this team of reps’ deceptive market timing activities and took steps to assist them, ensuring that this team of significant business producers could continue to facilitate market timing, the SEC says. In addition, some of these reps knowingly accepted numerous mutual fund orders from at least one of their timing customers after 4:00 p.m. ET, and processed those orders as though the customer had placed the order prior to 4:00 p.m. ET.

Canadian Imperial Holdings and World Markets consented to the entry of the commission’s order without admitting or denying its findings. “We are pleased to have settled this matter,” said John Hunkin, CIBC’s CEO. “We cooperated fully with these investigations. We have added policies and procedures to enhance our abilities to monitor and recognize such activities if they ever were to occur again.”

Hunkin added that CIBC had moved quickly to address this issue as soon as the company was made aware of the matter. CIBC discontinued financing hedge funds that engaged in market timing and dismissed several employees.

Spitzer’s office said that CIBC is cooperating with the attorney general’s office in ongoing investigations of the conduct of former CIBC employees and various entities with which CIBC did business. “CIBC provided significant cooperation to authorities and embraced reform,” Spitzer said. “This agreement compensates the investors who were harmed and allows the company to move forward.”

The SEC investigation is ongoing, too. It noted that it considered the firms’ cooperation in the investigation in deciding to accept the settlement.

“By knowingly financing customers’ late trading and market timing, as well as providing financing in amounts far greater than the law allows, Canadian Imperial Holdings and World Markets boosted their customers’ trading profits at the expense of long term mutual fund shareholders. This settlement will help compensate victims and prevent similar violations from happening in the future,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement.

Spitzer’s office says that CIBC is the 13th firm to settle improper mutual fund trading charges during the last two years. To date, the investigation has returned US$3.2 billion to investors.