By PATRICK McGEEHAN and RIVA D. ATLAS

Published: September 28, 2003

KENNETH D. LEWIS, the chairman and chief executive of Bank of America, is learning just how treacherous taking on Wall Street’s big boys can be.

Three years ago, he decided to join the hypercompetitive battle for the assets of affluent investors. He set the ambitious goal of more than doubling the amount of the bank’s profits from managing investments, a lucrative business dominated by mutual fund giants like Fidelity and brokerage firms like Merrill Lynch.

But Mr. Lewis’s grand plan has hit a big pothole. With one of his former employees facing criminal charges and the bank under investigation by regulators, he finds himself trying to repair the damage caused by what regulators describe as a typical Wall Street scheme. They contend that the bank was so hungry to do business with the family of Leonard N. Stern, the billionaire pet food mogul, that it sacrificed the interests of mutual fund shareholders to provide special trading privileges to Canary Capital Partners, a hedge fund run by Mr. Stern’s son Edward.

In the wake of the scandal, several Bank of America executives have been dismissed. But the man whom Mr. Lewis tapped to execute his Wall Street strategy — Richard M. DeMartini — remains at the bank, though speculation is rife that he, too, may be asked to leave.

How big a blow the Canary mess will deal to Mr. Lewis’s ambition is not yet clear. At a minimum, it is an embarrassment and a distraction to an executive who has worked diligently to maintain a clean image even as he yearned to compete with the big Wall Street firms on their own turf.

»If they are under the cloud of a regulatory investigation, it’s a strategy they may have to put on hold,» said Charles Peabody, an analyst at Portales Partners in New York. »It now seems like it’s going to be a much longer time process because it would be difficult to find somebody that would want to affiliate with them under this cloud. But there’s no doubt in my mind that they will persevere because that’s the mentality of Ken Lewis and that organization.»

Mr. Lewis declined repeated requests for an interview for this article.

The arrangement with Edward Stern might have been a model of the sort of synergy the bank’s executives hope to develop — if only prosecutors did not question its legality. Eliot Spitzer, the New York attorney general, charged Theodore C. Sihpol III, the Bank of America broker who landed Mr. Stern’s account, with securities fraud and grand larceny in allowing Mr. Stern to buy and sell shares at the day’s closing price long after the market had closed.

Mr. Stern and his fund agreed to pay a $40 million fine to settle the case but did not admit wrongdoing. Mr. Sihpol’s lawyer, Don Buchwald, said his client would plead not guilty because he had no criminal intent.

Mr. Lewis’s aggressive push into money management has riled employees at the bank’s headquarters in Charlotte, N.C. Some of them said they feared that the bank’s legal troubles were an inevitable result of a hasty and costly entry into unfamiliar terrain.

In the last three years, the bank hired scores of high-priced executives, bankers and brokers, setting many of them up in expensive offices in midtown Manhattan. Mr. DeMartini, a former senior executive of Morgan Stanley, one of the biggest firms on Wall Street, was put in charge of the operation.

Mr. DeMartini, 50, was the highest-ranking executive named in Mr. Spitzer’s complaint and is the only one still employed by the bank. He is filling in for Robert H. Gordon, who ran the mutual fund operation until he left this month because of the Canary scandal.

Mr. Spitzer’s evidence included an e-mail message that had been sent to Mr. DeMartini praising employees who had helped arrange Mr. Stern’s trading of the bank’s mutual funds. The message, attributed to Charles D. Bryceland, who was Mr. Sihpol’s supervisor, hailed the relationship with Mr. Stern as »a tremendous example of leveraging the franchise.»

Using the bank’s lending prowess to bolster its brokerage service was at the core of Mr. DeMartini’s strategy, people who have worked for him said. He often talked of the need to eliminate the »stovepipes» that separated the divisions he oversaw, they said.

Reluctant to be interviewed even in good times, Mr. DeMartini has declined to discuss what he knew about the matter. He made his only public statement in a letter to shareholders of the bank’s mutual funds, reassuring them that the bank would compensate them for any losses they might have suffered from Mr. Stern’s trading. Though the bank has not completed its internal investigation of the Canary case, people inside the bank said Mr. DeMartini’s job appears to be secure.

BUT some analysts have their doubts. Mr. Peabody said, »They just fired three top people, and I can’t believe DeMartini is going to survive this.»

People who have worked with Mr. DeMartini said that he studiously avoids the spotlight. They described him as aloof for a man who started as a stock broker and rose fast in a business where social skills are highly valued.