Nov. 20, 2003 — The Securities and Exchange Commission filed suit today against Pilgrim Baxter & Associates and its founders, charging them with fraud in connection with market timing of the PBHG Funds.
The suit, filed in federal district court in Pennsylvania, names Gary Pilgrim and Harold Baxter, who resigned from Pilgrim Baxter last week. The complaint, which also charges the defendants with breaching their fiduciary duties, was brought by the SEC simultaneously with the New York Attorney General’s Office.
The suit alleges that Pilgrim Baxter and the two men permitted a hedge fund, Appalachian Trails, in which Gary Pilgrim and his wife had a “substantial interest,” to make market timing trades in the PBHG Growth Fund (PBHGX) that Gary Pilgrim was managing.
The suit also contends that Baxter provided “non-public PBHG Fund information information to a close friend in the brokerage business who was president of Wall Street Discount Corp.,” a brokerage. The friend then allegedly passed the information to the firm’s customers, who used it to make market timing trades in PBHG funds and to “exercise hedging strategies through other financial institutions and brokerage houses.
In a statement released this afternoon, David Bullock, Pilgrim Baxter’s newly appointed chief executive, said the firm is cooperating with the SEC and New York regulators to resolve the trading matter, although it does not “agree with all the factual allegations or legal conclusions contained” in the complaint.
Bullock said it agreed with regulators that “the historical conduct that is the subject” of the complaint “was not consistent with the standard of professional and ethical behavior Pilgrim Baxter expects of all its employees.”
Regulators maintain that Appalachian Trails and Wall Street Discount, along with more than two dozen others, made “extensive exchanges” in and out of the funds with the defendants’ knowledge and consent, despite the fund company’s policy of limiting exchanges to four per year.
“This large-scale abuse peaked with timing assets of close to $600 million, and continued into the summer of 2001,” when the defendants halted trading by the market timers, except for Appalachian Trails and Wall Street Discount, and redeemed their shares, the SEC said. The hedge fund and the brokerage allegedly were permitted to continue trading until the end of 2001.
Between 2000 and 2001, Appalachian profited by more than $13 million in its trading, $3.9 million of which was Gary Pilgrim’s share, the SEC said.
The firm’s founders did not disclose Appalachian’s trading or Gary Pilgrim’s interest in the hedge fund to the boards of Pilgrim Baxter and the funds, or to the funds’ shareholders, the SEC said.
Baxter and Gary Pilgrim left the fund company after its internal investigation revealed that they might have been involved in questionable trading activities. Baxter stepped down as chairman and chief executive officer and also stepped down as chairman and trustee of the PBHG Funds’ board. Gary Pilgrim left as president of the PBHG Funds and the PBHG Insurance Series Fund.