Pimco Affiliate CEO to Settle SEC Lawsuit

Kenneth Corba, former chief executive of PEA Capital, agreed Monday to pay $200,000 to settle a U.S. government fraud suit claiming that he engaged in illegally timed trading with a hedge fund at the expense of other customers.

PEA Capital is a sister unit to Newport Beach-based Pacific Investment Management Co., the nation’s largest bond mutual fund company. Based in New York, PEA Capital is an advisor to the Pimco family of stock funds.

The Securities and Exchange Commission sued Corba and PEA Capital two years ago, alleging that they allowed the Canary Capital Partners hedge fund to secretly make more than $4 billion worth of trades at preferred prices.

“The defendant negotiated a secret arrangement that permitted a single favored investor to engage in a trading strategy that was denied to ordinary investors,” Randall Lee, regional director of the SEC’s Pacific Regional Office, said in a statement Monday.

U.S. regulators filed complaints against more than a dozen companies for their involvement in improper trading. The probe of the fund industry led to more than $3.5 billion in penalties, restitution and fee cuts paid by at least 30 companies, including Putnam Investments and Bank of America Corp.

Market timing takes advantage of the fact that although mutual fund shares are priced once a day at 4 p.m. New York time, the securities that the funds own trade continuously around the world.

By buying on days when fund prices didn’t reflect the most recent news and selling the next day, market timers diluted the gains of long-term shareholders, the SEC claimed in its suit.

Corba, 53, of Greenwich, Conn., neither admitted nor denied the allegations in the suit, the SEC said in the statement. He agreed as part of the accord not to associate with any investment advisor for at least a year.

Corba’s lawyer and PEA Capital didn’t return calls for comment.

A civil trial is scheduled to begin in U.S. District Court in Manhattan next Monday against another defendant in the case, Stephen J. Treadway. He formerly headed Pimco Advisors Distributors, which sold the Pimco funds.

According to the SEC, Corba told Treadway in January 2002 that Canary wanted to make trades that “could potentially run afoul of” Pimco’s “market timing policies,” the SEC complaint said. Treadway gave his approval, according to the complaint.

Treadway, who has denied the allegations, plans to go to trial next week, his attorney said Monday.

PEA Capital, Pimco and Pimco Advisors Distributors are all units of German insurance company Allianz.