YOUR MONEY : Pilgrim Exec Faces Suspension in Silence

Palomba Weingarten has never minced words about her competitors and detractors in the mutual fund business. But the head of the L.A.-based Pilgrim Group funds is silent now as she faces what may be her biggest challenge.

A regional committee within the National Assn. of Securities Dealers, the self-regulatory organization for brokers, has recommended that the 51-year-old Weingarten be suspended for one year as a principal of Pilgrim’s funds distribution arm.

The suspension--and a suggested fine of $100,000--stem from the NASD’s probe into Pilgrim fund advertising that set off a storm of controversy in the fund industry last year.

The NASD committee ruled that Pilgrim ran ads containing “misleading or exaggerated statements” about the performance of some of its funds (mostly bond funds) and that Weingarten’s conduct “was intentional” in creating the ads.

Pilgrim, in turn, insists that the disciplinary action is extraordinary relative to the charges leveled against it.

“Our ads were not significantly different from other (fund) ads that appeared in the period,” said Theodore J. Cohen, Pilgrim’s general counsel. “Our view is that we were caught in the midst of an industry debate and that Pilgrim ads became the focus of that debate.”

In fact, some fund industry experts concede they were shocked by the NASD recommendation of a one-year suspension for Weingarten. The ruling, issued May 13 but made public Tuesday in the Wall Street Journal, is being appealed by Pilgrim to a national NASD committee. Meantime, the usually outspoken Weingarten is making no public statements.

“It is a very severe penalty,” said Michael Lipper of fund tracker Lipper Analytical Services in New York.

The NASD ruling is the latest in a string of controversies that have dogged Weingarten and Pilgrim, which she acquired as majority shareholder in 1989. Her husband, Robert Weingarten, had run First Capital Holdings, an insurance company that was seized by California regulators in 1991 in the fallout of the junk bond market’s collapse.

Pilgrim had been a part of First Capital until Palomba Weingarten bought it out. A former music professor-turned-stockbroker, she and her husband moved to Los Angeles in 1983 from New York City and began building Pilgrim/First Capital from scratch.

Since 1989, the now $2.5-billion-asset Pilgrim fund company--which manages mostly bond funds that invest in adjustable-rate mortgages--has received much more unwanted publicity than most fund companies of its size:

* Competitors and independent fund analysts have criticized Pilgrim for its accounting practices on some of its bond funds, which have had the effect of overstating the funds’ yields while costing shareholders a principal loss. For its part, Pilgrim has noted that its accounting is legal and that some other fund companies have used the same method.

* In 1992, Pilgrim angered some shareholders by turning its open-end “prime rate” income fund into a closed-end fund, a move designed partly to halt potential shareholder redemptions at a time when that type of fund suddenly became unpopular.

* Earlier this year, Pilgrim agreed to reimburse one of its bond funds, the Pilgrim Adjustable Rate fund, for consultant fees the fund paid in the late 1980s. The fund’s board found that some of the fees were inappropriate.

But no issue has become as heated for Pilgrim as the one surrounding some of its advertising. In a January, 1993, ad in the Journal, Pilgrim labeled a series of its funds “No. 1,” “No. 2,” “No. 3” etc. under a headline that read, “Pilgrim Group is proud to announce the final 1992 Mutual Fund Rankings as determined by Lipper Analytical Services.”

The NASD committee judged that the ad’s headline “contains no qualification or explanation concerning the fact that the rankings refer to several limited categories” of mutual funds, rather than to the giant universe of funds.

“The only qualification alluded to in the rankings is a footnote in the form of an asterisk placed in the upper right-hand corner of each number,” the NASD said. “The asterisk refers to very small print at the bottom of the advertisement, which states, ‘In its category.’ (But) the qualifier does not disclose the specific categories selected to create the consecutively numbered rankings.”

The NASD committee concluded, “We find . . . that the advertisements are false and misleading in their overall effect, contain exaggerated statements and omit material information” in violation of NASD fund marketing rules.

The controversy over the ad first bubbled over when it was attacked by independent mutual fund rater Morningstar Inc. in Chicago, under a story that appeared in a Morningstar newsletter.

Outraged, Weingarten sued Morningstar for libel, but the case was tossed out of court.

Pilgrim’s Cohen argues that the Pilgrim ad became an unfair focal point as regulators were questioning fund industry ad practices in general. The Securities and Exchange Commission just recently approved long-awaited guidelines that sharply restrict how fund firms can use performance rankings, such as Lipper’s, in ads.

In coming down hard on Pilgrim, Cohen contends, “part of the NASD’s objective is to use Pilgrim to send (a) message” to the fund industry regarding ad practices. But a one-year suspension for Weingarten, Cohen charges, is a punishment “grossly disproportionate” to that imposed on other fund firms for allegedly misleading ads.

Many fund executives concede privately that Weingarten’s brash and outspoken manner have long made her a target of criticism in the normally genteel fund world. In an interview last October in the Journal, she derided the behind-the-back talk about her style and about Pilgrim. “Disgusting,” the Journal quoted her as saying. “If you want to criticize me, pick up the phone and say, ‘Hey bitch, what about the ad?’ Deal with me like a man.”

Meanwhile, Pilgrim executives insist that disclosure of Weingarten’s proposed suspension is not affecting Pilgrim investors. Day-to-day management of the funds is by individual portfolio managers, not Weingarten. But Pilgrim is dependent on major brokerages nationwide to sell its funds, so any adverse publicity can affect individual brokers’ willingness to tout the Pilgrim name.

At Merrill Lynch & Co., a leading seller of Pilgrim funds, an executive said that “in terms of performance” of the funds, Merrill has no problem with Pilgrim. As for Weingarten’s possible suspension, “We’re aware of the situation and are monitoring it,” said Allen N. Jones, Merrill’s senior vice president for individual financial services.