Civil Fraud Trial Begins for Ex-Pimco Executive

A former Pimco executive betrayed investors and violated securities laws when he approved a secret deal with a hedge fund that put its interest ahead of mutual fund investors, a government lawyer said at the start of a civil fraud trial Monday in New York.

In May 2004, the Securities and Exchange Commission brought charges against Stephen Treadway, who at the time headed Pimco Advisors Distributors, which sells Pimco mutual funds. The unit is a sibling to Newport Beach-based Pacific Investment Management Co., the nation’s largest bond mutual fund company.

Treadway, 58, is accused of approving and failing to disclose a market-timing agreement with Canary Capital Partners, a hedge fund run by financier Edward Stern.

Canary was allowed to engage in numerous improper trades involving more than $4 billion in several Pimco funds from February 2002 to April 2003, the SEC said.

“This is a case about a top corporate executive who misled investors and betrayed their trust,” Jose Sanchez, an attorney with the Los Angeles office of the SEC, told an eight-person jury in U.S. District Court in Manhattan.

But Treadway’s lawyer told the jury in opening arguments that his client did not know about the deal with Canary.

“It was a secret deal, but the secret was kept from Steve Treadway,” defense attorney Alan Levine said.

Kenneth Corba, former chief executive of PEA Capital, an investment advisor to Pimco stock funds, agreed last week to pay $200,000 to settle civil fraud charges related to the market-timing arrangement with Canary.

In market timing, the average mutual fund investor is cheated out of profits by professional traders who buy and sell fund shares rapidly to exploit pricing inefficiencies.