SEC Sues East Coast Pimco Units
The Securities and Exchange Commission sued the firms that run Pimco’s stock mutual funds and two top executives Thursday, claiming they defrauded investors by letting a well-heeled hedge fund make quick trades that hurt other shareholders.
The SEC’s civil complaint targeted Pimco’s East Coast stock operations and didn’t name Newport Beach-based Pacific Investment Management Co., the company that runs Pimco’s prominent lineup of bond funds.
New Jersey has filed a separate suit alleging trading abuses by the Newport Beach bond shop as well as at the stock funds. Analysts said federal regulators and New Jersey officials appeared to be taking sharply different paths.
“The most notable thing about the complaint is that it doesn’t include Pimco Newport Beach,” said Eric Jacobson, senior analyst at research firm Morningstar Inc. “If there are other cases in which the SEC and state regulators filed substantially different charges, I can’t think of one.”
SEC officials, who declined to comment on the New Jersey probe, said the SEC suit was significant because it named the top executives of the stock funds.
“Misconduct at a mutual fund family occurs only through the actions of individuals, and here we allege that the misconduct at Pimco’s equity funds started right at the top,” said Randall R. Lee, director of the SEC’s Los Angeles office, which led the investigation.
The SEC’s case, filed in federal court in Manhattan, is the latest chapter in the eight-month-long crackdown by state and federal regulators on “market timing” and other abuses in the $7.6-trillion mutual fund industry.
The SEC named PEA Capital, advisor to Pimco’s stock mutual funds; Pimco Advisors Fund Management, administrator of the firm’s “Multi Manager Series” of funds; and Pimco Advisors Distributors, which monitors shareholder trading, among other duties.
The complaint also named Stephen J. Treadway, chief executive of the two Pimco Advisors firms and chairman of the Pimco stock funds’ board of trustees, and Kenneth W. Corba, who recently quit as chief executive of PEA Capital.
They are accused of violating U.S. securities laws by failing to disclose a market timing pact with the now-defunct Canary Capital Partners hedge fund in 2002 and 2003 and by misrepresenting their policies on timing.
PEA Capital and its affiliates called the charges “inappropriate,” saying market timing was not prohibited by the funds’ prospectuses and that only one fund was diluted by the trading.
“We are disappointed the SEC chose to take this action now, and we look forward to completing settlement discussions with the SEC, which have been underway, so we can achieve a prompt and equitable resolution to this matter,” the firm said in a statement.
Corba “adamantly denies all of the allegations of wrongdoing” made by the SEC, said his attorney, Jim Rehnquist. Treadway’s lawyer declined to comment.
PEA and the two Pimco Advisors units, based in New York and Connecticut, are owned by Germany’s Allianz, as is Pimco’s bond unit in Newport Beach.
New Jersey filed suit against the bond business in February, prompting Pimco co-founder Bill Gross to deny wrongdoing. At the same time, Gross sought to distance his fiefdom from the stock funds, saying he would lobby the parent company to deny use of the Pimco name by the stock funds.
In its suit, New Jersey alleged that Newport Beach-based Allianz Dresdner Asset Management of America, Pacific Investment Management Co. and the three stock fund units committed fraud by allowing Canary to time the firm’s stock and bond funds to the detriment of other investors.
It said the hedge fund used five of Pimco’s bond and money market funds to conduct market timing. In seven months during 2003, for example, Canary netted a profit of $938,000 by making a series of trades between Pimco’s High Yield bond fund and its money market fund.
Pimco has been given until May 21 to respond to the New Jersey case. The response deadline has been extended twice, fueling speculation that settlement talks are continuing. Both sides declined to comment.
Lipper Inc. analyst Don Cassidy said his review of fund sales and redemption activity indicated that the Pimco bond funds were not timed to any significant degree.
“Two offices, two coasts, two cultures, two managements,” Cassidy said.
The SEC alleges that the Pimco stock funds allowed the Canary hedge fund to make 108 in-and-out trades involving a total of $4 billion from February 2002 to April 2003.
Authorities say the trades were designed to exploit pricing inefficiencies. Market timing is not illegal, but firms have been accused of fraud in letting favored investors engage in the practice while officially discouraging it. Timing can harm long-term investors, officials say, by siphoning profits, driving up transaction costs and forcing managers to hoard cash to meet redemptions.
The Pimco Advisors units and PEA allegedly gave “timing capacity” to Canary in return for long-term investments known as sticky assets, which generated management fees. The funds failed to disclose that such a deal had been made, regulators charged. Instead, according to the SEC, fund prospectuses gave the misleading impression that timing was discouraged.
Canary employed more than $60 million in timing money while investing $27 million in sticky assets. Meanwhile, Pimco Advisors kept at least 400 other shareholders from timing, the SEC said.
The SEC alleged that Treadway approved the Canary deal in early 2002 but did not disclose his knowledge of it to the board of trustees until September 2003. Corba also signed off on the deal, the SEC said.
