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PIMCO's Gross Says Canary Trades Never Hurt Shareholders

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NEWPORT BEACH, Calif. (–Calling Pacific Investment Management Co.’s relationship with Canary Capital Partners LLC “unfortunate,” PIMCO Chief Investment Officer Bill Gross insisted in a letter to clients that the Secaucus, N.J. hedge fund’s trades never hurt shareholders in the bond firm’s mutual funds.

In his Feb. 19 letter, which was co-signed by PIMCO Chief Executive William Thompson, Mr. Gross said Canary’s trades, which were clearly labeled as so-called “timing” assets, were made through an agreement that did not violate the shareholder protection in PIMCO’s prospectuses.

Mr. Gross said PIMCO monitored Canary’s trades and that company officials believe Canary’s trading was infrequent and did not harm shareholders. Mr. Gross also said PIMCO never made any arrangements for Canary to invest so-called “sticky assets,” or money designated as long-term, in any PIMCO fund in exchange for the ability to market time, or frequently trade in and out of, PIMCO’s mutual funds.

“To the best of our knowledge, PIMCO has never had any arrangements pertaining to ‘sticky funds,’ late trading/stale pricing arbitrage or improper dissemination of fund holdings,” Mr. Gross wrote. “The investments we knew about … had monitoring provisions to prevent excessive trading. It apparently worked. To our knowledge, this Canary trading was infrequent, did not come close to violating the prospectuses and harmed no shareholders in the fund.”

“In perfect hindsight, we wish we had never attracted [Canary] among our many thousands of loyal fund shareholders,” Mr. Gross continued. “But we can’t change that and if any investor in our funds was disadvantaged by this arrangement, then we want to give assurance we will make it up–in full.”

Messrs. Gross and Thompson sent their letter two days after the New Jersey Attorney General’s office filed a lawsuit against PIMCO’s parent company, Allianz Dresdner Asset Management of America LP, and three PIMCO units alleging the company allowed market timing in its mutual funds in violation of its prospectuses Previous HedgeWorld Story.

The New Jersey complaint alleges that PIMCO Equity Advisors LLC, now known as PEA Capital LLC, and PIMCO itself provided Canary with US$100 million in market-timing capacity in its PEA Target, Opportunity, Growth and Select Growth funds. In exchange, Canary agreed to invest US$25 million in long-term assets in a separate fund. The agreement PIMCO made with Canary allowed for four trades in and out of the funds a month, compared with the six round-trip trades a year PIMCO allowed other investors to make.

A second agreement between PIMCO and an unnamed consultant allowed for up to 12 round-trip trades a year, double what was allowed according to the fund prospectuses.

In the letter to clients, Mr. Gross wrote that while he has supported investigations into Enron Corp., Houston, and WorldCom Inc., Clinton, Miss., and the subsequent indictments of executives in those cases, he believes the allegations against PIMCO are unfounded.

“Sometimes a cleansing process can go too far,” Mr. Gross wrote. “Allegations are different from facts and our representatives will work vigorously with regulators to make all of the facts understood. We are not perfect and we are not above the law, but throughout my 30-plus years at PIMCO, and for the past 10 years for which Bill Thompson has been CEO, we have endeavored to build a franchise that we, our fellow professionals and associates, our family and friends, and … our clients can be proud to be a part of.”

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