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Portfolio > Mutual Funds

Hedge Fund Plays Role in Pilgrim Baxter Investigat

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NEW YORK (–Appalachian Trails is the latest hedge fund to be snagged in Eliot Spitzer’s net as the New York State Attorney General’s office continues its investigation of mutual fund timing.

Appalachian Trails joins other hedge fund operations already involved in Mr. Spitzer’s investigation, such as those of Canary Capital Management LLC, Secaucus, N.J., Alliance Capital Management LP, New York, and Millennium Management LLC, New York .

This case exhibits a different feel, though, because not only did the mutual fund company encourage its funds to be part of a market-timing strategy but also the founder of the mutual fund company was one of the initial investors in the hedge fund doing the alleged market timing.

Gary Pilgrim, the defendant in the Pilgrim Baxter mutual fund timing case, managed the PBHG Growth fund and also was among the first investors in Appalachian Trails LP, maintaining a substantial ownership interest in Appalachian, according to a complaint filed in New York State Supreme Court today.

The compliant alleges that, with the knowledge and consent of Chairman and CEO Harold Baxter, Appalachian was allowed to “feverishly” trade in and out of the PBHG Growth Fund and to trade in other funds. The New York State Attorney General’s office also charges that Appalachian made nearly 100 exchanges in and out of the PBHG Growth Fund in 2000 and 2001.

In exchange, Mr. Pilgrim was rewarded a substantial share of Appalachian’s profits from those trades, which Mr. Spitzer’s staff estimates to be in the millions. Meanwhile, Spitzer’s office estimates that a buy-and-hold shareholder invested in the PBHG Growth Fund would have lost more than 60% of his investment.

At the same time, the complaint points to an email message Mr. Pilgrim sent to a fellow portfolio manager saying: “I think timers are a loser for our shareholders and probably not even in our business interests. So I would give them the boot period.” According to the complaint, the aggregate trading volume during various periods of timing by Appalachian totals US$3.5 billion.

Since the investigation into Pilgrim Baxter & Associates began, Messrs. Pilgrim and Baxter have resigned. Pilgrim President and CEO David J. Bullock told shareholders in a letter that Mr. Pilgrim would contribute to the PBHG funds all personal profits he received from the limited partnership’s investments in the PBHG.

The market-timing trades began in March 2000 when Appalachian was allowed to trade the PBHG Growth Fund and the PBHG Technology & Communications Fund. The trading was stopped by January 2002, when the documents uncovered by Mr. Spitzer’s office show that all “timers,” such as Appalachian, were eliminated.

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