Fund Group Facing Investor Class Actions : Lawsuits: Shareholders say Century City-based Pilgrim obscured potential problems with bond holdings.


Pilgrim Group, a long-troubled mutual fund company based in Century City, is facing at least six shareholder lawsuits alleging that the firm failed to disclose risks and pricing problems involving some of its bond mutual funds.

The funds, which invest in adjustable-rate mortgage bonds, were among the worst-performing mutual funds last year and their steep decline has continued in 1995, even as most bond funds have rebounded.

The Pilgrim Adjustable Rate Securities I-A fund, for example, slumped 20.5% last year and is down 9.3% so far this year, according to fund-tracker Lipper Analytical Securities.

Another fund, Pilgrim Adjustable U.S. Government I-A, lost 13% last year and is down 1.4% so far this year.

In contrast, the average adjustable-rate mortgage fund fell 2.2% in '94 and has risen 0.2% since Jan. 1.

Pilgrim, which says it will "vigorously defend" itself against the class actions, contends that its disclosure about the type of bonds the funds can own was adequate. "We're saying that we laid everything out," said Eric Landau, an attorney representing Pilgrim.

Pilgrim has maintained that it has been victimized by an unforeseen rise in shareholder redemptions from the funds at a time when certain adjustable-rate mortgage (ARM) bonds have become more difficult to accurately price--and sell--in the market.

Though ARM bonds are backed by adjustable-rate home loans, so that the bonds' interest earnings should rise with market interest rates, Pilgrim had invested heavily in ARM bonds that are especially susceptible to losses in the face of mortgage defaults.

Pilgrim's California ARM bonds, in particular, have suffered from "higher delinquencies (and) frequencies of default" than had been expected, the firm said.

What's more, as shareholders have cashed out of the slumping Pilgrim funds--driving assets down to $120 million or less today from $400 million last fall--the company has sold its most marketable securities while being forced to hold onto some of the most troubled and unwanted bonds.

Pilgrim now says the percentage of "illiquid" securities in its ARM funds exceeds 15% of assets, though Landau could not immediately supply a specific number.

Landau said the funds' losses and ongoing shareholder redemptions don't threaten Pilgrim's survival.

"I believe Pilgrim is going to deal with this," he said.

The firm, headed by Palomba Weingarten, has been embroiled in several controversies in recent years.

Last year, Weingarten was censured for alleged advertising abuses.

In December, she said she would sell most of Pilgrim's funds and the Pilgrim name to Express America Holdings Co. However, Weingarten said she intends to retain the ARM funds under a new corporate name. The deal is pending.

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