A federal jury in New York on Friday found that the former head of Pimco stock funds violated securities laws, handing the Securities and Exchange Commission a major victory in its pursuit of mutual-fund trading abuses.
The civil verdict came against Stephen Treadway, the former chief executive of Pimco Advisors Distributors, who had been accused by the SEC of helping a hedge fund improperly trade mutual-fund shares. The lawsuit against Treadway was the first of the cases involving the rapid trading of mutual funds -- a practice known as market timing -- to go to trial.
"Investing in a mutual fund is an act of trust in those who manage and invest your money," said Randall Lee, director of the SEC's office in Los Angeles. "The evidence in this case showed -- and the jury agreed -- that defendant Treadway betrayed that trust and defrauded investors by allowing a single wealthy investor to engage in a trading strategy that was denied to ordinary investors."
Treadway had been accused of approving an arrangement in January 2002 that allowed now-defunct hedge fund Canary Capital Partners to repeatedly buy and sell mutual-fund shares in exchange for making long-term investments in funds, generating fees for the fund-management company. He didn't disclose the special arrangement until September 2003, the SEC had alleged.
Treadway denied the SEC's allegations. His lawyer, Alan Levine, told jurors his client didn't know about the arrangement with Canary.
"We are very disappointed with the jury's verdict," Levine told Bloomberg News.
Treadway faces possible civil penalties or other sanctions. A hearing is scheduled July 14 before U.S. District Judge Victor Marrero.
The Pimco stock funds are now known under the brand name of Allianz, the German insurer that bought Newport Beach-based Pimco Advisors in 2000. Pimco's well-known bond-fund group, Pacific Investment Management Co. headed by William Gross, was never accused of wrongdoing.
Another Pimco stock fund executive, Kenneth Corba, settled SEC charges on June 12.