Mutual Fund Firm Founders Resign
Pilgrim Baxter & Associates became the latest mutual fund company ensnared in the spreading fund industry scandal when it revealed Thursday that its founders had resigned because of an improper trading arrangement.
In a letter to shareholders, the company said founder Gary L. Pilgrim, with the knowledge of co-founder and Chief Executive Harold J. Baxter, had privately invested in a limited partnership that made money in 2000 and 2001 by rapidly trading shares of PBHG Funds, which are managed by Pennsylvania-based Pilgrim Baxter.
That type of trading -- known as market timing -- has been a focus of the multiple investigations now underway across the mutual fund industry. Dozens of companies, including Pilgrim Baxter, have been subpoenaed this year by federal and state regulators seeking information about trading practices.
Regulators have said companies that prohibited market timing but made exceptions for favored clients could be charged with fraud.
PBHG Funds had no policy against market timing at the time of the trades, although Pilgrim Baxter later adopted one. And the company said it had no evidence that Pilgrim, who was then also the president of the PBHG Funds, or any other employee gave the partnership inside information, but the company said it still believed that the arrangement was inappropriate.
Pilgrim Baxter’s president, David J. Bullock, said the changes resulted from an internal review begun in September after federal and state regulators began examining procedures at mutual fund companies nationwide.
The firm said Pilgrim had agreed to turn over all personal profits he received from the partnership’s investments in PBHG Funds. The firm said it would reimburse the fund all management fees it had earned on the partnership’s trades.
The company declined to say how much Pilgrim would pay, or whether the resignations would affect the two executives’ retirement benefits.
In other mutual fund developments Thursday:
* Loomis Sayles & Co. said an internal investigation found two arrangements that allowed frequent trading in its flagship $1.9-billion bond fund. The agreements with the two undisclosed investors didn’t harm fund shareholders, the company said. Boston-based Loomis said that one arrangement was with an institutional investor and that the other was with an investor that has been cited in a regulatory investigation.
* Sens. Jon Corzine (D-N.J.) and Christopher J. Dodd (D-Conn.) proposed legislation to address trading abuses in the $7-trillion mutual fund industry by putting independent directors in charge of fund boards, stiffening penalties and telling investors more about the fees they pay. The Dodd-Corzine bill, to be introduced next week, would increase penalties for late-trading violations, require funds to establish firm market-timing policies and let funds raise fees for short-term redemptions, which would be aimed at discouraging market-timing trades. They didn’t give specifics on how much penalties would be increased.
