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Pimco Charges Are Dropped; Sister Firm Settles Allegations

June 02, 2004|Tom Petruno | Times Staff Writer

The New Jersey attorney general on Tuesday dropped charges of improper mutual fund trading against Newport Beach-based bond fund giant Pimco, while the company's sister firm, PEA Capital, agreed to pay $18 million to settle similar charges involving stock funds.

The resolution is a victory for Pimco's Bill Gross, perhaps the world's best-known bond fund manager, who had publicly attacked the New Jersey case against his operation. He insisted Pimco had done nothing wrong.

By standing up to regulators, the 60-year-old Gross became a hero to fund company executives who had privately contended that some state officials were unfairly piling on in the scandals that have rocked the $7.5-trillion fund industry since September.

The New Jersey case, filed in February, lumped Pimco and PEA Capital with other mutual fund companies that had allowed investment firm Canary Capital Partners to engage in the fast-paced trading of fund shares known as market timing, allegedly to the detriment of buy-and-hold investors.

Both Pimco and New York-based PEA are owned by German insurance giant Allianz but are managed separately.

Gross contended that although Canary Capital did market-time two Pimco bond funds, the trading did not violate any conditions set by fund managers and other investors weren't harmed.

Notably, the Securities and Exchange Commission, which has teamed up with other states in cracking down on trading abuses, did not join New Jersey's suit against Pimco, short for Pacific Investment Management Co.

"When the SEC didn't take action against Pimco, that was a big chip on the poker table," Gross said Tuesday.

New Jersey Atty. Gen. Peter C. Harvey said the decision to drop the case against Pimco was based on information his office had received since the suit was filed in February. He declined to say what that information was.

Gross said Pimco had forwarded to New Jersey depositions of Pimco personnel that the SEC had taken as part of its own probe.

Harvey dismissed criticism by some securities lawyers that New Jersey brought charges against Pimco without foundation. "We acted based on the evidence presented to us at the time," he said.

Unlike Pimco, PEA Capital had acknowledged that market timing by Canary diminished returns to other investors in one of its stock funds.

Although it did not admit wrongdoing, PEA Capital agreed Tuesday to several reforms and to pay New Jersey $15 million in fines and $3 million in legal costs to settle the case.

The suit alleged that PEA Capital allowed Canary to conduct $4 billion in market-timing trades from 2001 through 2003.

Don Phillips, a principal at fund research firm Morningstar Inc. in Chicago, said he believed New Jersey's case against PEA Capital was a strong one, but that the charges against Pimco "seemed much more tenuous."

New Jersey alleged that PEA Capital allowed Canary to trade in and out of four stock funds -- PEA Target, PEA Opportunity, PEA Innovation and PEA Growth -- in return for other investments in PEA portfolios that generated fees for the company.

Rapid trading of fund shares isn't necessarily illegal, but it can constitute fraud if a fund permits it in violation of its own bylaws. Such trading also can raise portfolio costs borne by all investors in a fund and can siphon returns from long-term holders.

In its defense, PEA Capital in February said it found that Canary's trading caused no financial harm to three of the four funds involved. The fourth, PEA Growth, had its returns diluted by $1.2 million, PEA Capital said.

The firm at the time said it would reimburse the four funds for $1.6 million, with $1.2 million going to PEA Growth and the remainder, representing rebated management fees, spread among all four funds.

Harvey said he was satisfied that that payment compensated PEA Capital fund owners for their losses. They won't share in the $18-million settlement.

As part of the settlement, Stephen J. Treadway, chairman of PEA stock funds' board of trustees, will step down. He will remain chief executive of the funds' distribution company.

A PEA Capital spokesman said Treadway wouldn't comment on the settlement.

Kenneth W. Corba, who was CEO of PEA Capital and was named in the New Jersey suit, resigned in April. He could not be reached for comment Tuesday.

PEA Capital, Treadway and Corba still are facing an SEC suit over alleged improper trading. That case was filed in May.

Although a number of other fund companies have settled charges of trading abuses, the case against Pimco stood out because Gross, the fund firm's chief investment officer, immediately went on the offensive.

In interviews and full-page newspaper ads in February, Gross asserted that the charges against Pimco bond funds were unwarranted and that he would not agree to a settlement.

He also criticized himself, and parent company Allianz, for allowing PEA Capital to market its stock funds using the Pimco brand name, which Gross had built up for 30 years before Allianz bought Pimco in 1999.

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