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Portfolio > Mutual Funds

NJ Attorney General Clears PIMCO, Settles with Allianz and Affiliates

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TRENTON, N.J. (–Put one in the win column for Bill Gross.

On the same day New Jersey Attorney General Peter C. Harvey announced he had reached an US$18 million settlement of market-timing charges with Allianz Dresdner Asset Management of America LP and two of its affiliates, Mr. Harvey also said he was dropping those same charges against Mr. Gross’ Newport Beach, Calif.-based Pacific Investment Management Co. LLC.

The announcement by Mr. Harvey simultaneously underscored the extent of the mutual fund market-timing scandal and vindicated Mr. Gross, PIMCO’s chief investment officer, who had maintained all along that his firm had done nothing wrong.

“Mr. Gross has demonstrated in his public statements that he shares our view about protecting the integrity and health of his fixed-income funds,” Mr. Harvey said in a statement.

Separately, Mr. Gross and PIMCO Chief Executive William Thompson issued their own statement carefully claiming victory. “Today’s announcement to dismiss charges against PIMCO validates what we have said publicly for several months–that we believed when all facts were reviewed carefully against the allegations, New Jersey would conclude no legal violations occurred and no PIMCO bond fund shareholders were ever harmed,” they wrote. “We are pleased that this position has now been substantiated by the New Jersey Attorney General’s action. …”

PIMCO officials had reacted angrily to being dragged into the mutual fund market-timing labyrinth when Mr. Harvey’s office filed the initial charges in February.

In a letter to investors, Messrs. Gross and Thompson acknowledged that hedge fund Canary Capital Partners LLC, Secaucus, N.J., was an investor in PIMCO bond funds, and that it conducted market timing. But they maintained that the timing was monitored and that there was no quid pro quo relationship, meaning Canary never promised to invest so-called “sticky funds” in PIMCO mutual funds in exchange for timing capacity. Later, the men referred to the firm’s dealings with Canary as “unfortunate”.

In their statement Tuesday [June 1], Messrs. Gross and Thompson hinted that confusion–about Allianz affiliates that at one time shared the PIMCO name but that were separate from well-known US$395 billion bond manager–was to blame for dragging the firm’s name through the mud. PEA Capital LLC, which allegedly entered into an arrangement for Canary to market time its Multi-Manager Series mutual funds via Brean Murray Inc., a New Jersey-based broker-dealer, formerly known as PIMCO Equity Advisors LLC. PA Distributors LLC, which allegedly overlooked the arrangement, was formerly known as PIMCO Advisors Distributors LLC.

“We have also learned from this experience,” Messrs. Gross and Thompson wrote. “In the near future, we will ensure that the name ‘PIMCO’ only applies to businesses we manage, and we will never take our clients’ trust for granted.”

Allianz Dresdner Asset Management of America and two of its affiliates, meanwhile, agreed to pay a civil penalty of US$15 million, plus US$3 million in costs related to the investigation and other “enforcement initiatives,” according to the New Jersey Attorney General’s office. Acknowledged in the settlement is the fact that PEA Capital reimbursed the Multi-Manager Series funds US$1.6 million for Canary’s market timing after the state filed suit.

In the original lawsuit, New Jersey officials claimed Canary’s market timing added up to more than US$4 billion worth of transactions.

Also included in the settlement are a number of changes in governance policies and procedures to be instituted by PEA Capital and PA Distributors, among them:

  • Business and portfolio management operations at PEA Capital will be separated.
  • Legal and compliance functions will be further separated from sales and management.
  • Steven Treadway, chief executive of PA Distributors, will resign as chairman of the board of the Multi-Manager Series funds. Kenneth Corba, PEA Capital’s chief executive, resigned after the original lawsuit was filed.

In a statement, officials at PEA Capital and PA Distributors said they were “pleased” the lawsuit had been settled and said the governance and policy changes that resulted represented a “confirmation of their commitment to shareholders.”

As part of the settlement, officials at PEA Capital, PA Distributors and Allianz Dresdner Asset Management of America did not admit or deny the findings on which the original New Jersey lawsuit was based.

Settlement of the charges brought by New Jersey had no effect on separate civil fraud charges filed May 6 by the Securities and Exchange Commission against PEA Capital, PA Fund Management LLC, PA Distributors and Messrs. Treadway and Corba. Settlement talks with SEC officials on those charges are ongoing, according to a statement from PEA Capital.

SEC spokesman John Nester said it was the commission’s policy not to comment on ongoing litigation and said any settlement with the SEC “must be in the public interest and fairly reflect the gravity of the misconduct.”

Pacific Investment Management Co. was not named in the SEC lawsuit.

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Contact Robert F. Keane with questions or comments at:

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