WAYNE, Pa. (HedgeWorld.com)–Pilgrim Baxter & Associates Ltd. agreed to pay US$90 million in fines and civil penalties, lower its management fees by US$10 million over the next five years and implement other governance changes in separate settlement agreements with federal and state regulators announced Monday [June 21].
Pilgrim Baxter, the investment adviser to the PBHG Funds mutual fund family, had been accused by the Securities and Exchange Commission and the New York Attorney General’s office of allowing market timing in some of its funds. Among the firms allegedly allowed to make rapid in-and-out trades of the PBHG funds was a hedge fund–Appalachian Trails LP–in which Pilgrim Baxter founders Gary L. Pilgrim and Harold J. Baxter were investors.
Both the SEC and the New York attorney general’s office continue to pursue separate civil complaints against Messrs. Pilgrim and Baxter.
In its settlement with the SEC, Pilgrim Baxter & Associates agreed to pay US$40 million in restitution to shareholders harmed by the market timing, plus another US$50 million in civil penalties. The entire US$90 million will be placed in a special fund and distributed to shareholders in accordance with a plan to be developed by an independent consultant.
The firm also has agreed to implement a 2% redemption fee on PBHG mutual fund shares sold within 10 days of their purchase; amend prospectuses to more clearly disclose anti-market timing policies; enhance the firm’s Code of Ethics to prohibit investments by employees that could cause a conflict of interest with fund shareholders; expand Pilgrim Baxter’s legal and compliance teams; and adopt a new policy on public disclosure of fund holdings.
The firm also agreed to continue helping with investigations into actions by Messrs. Pilgrim and Baxter.
Ari Gabinet, district administrator for the SEC’s Philadelphia District Office, said in a statement that the punishment fit the transgression. He said Pilgrim Baxter was an “early haven” for market timers and that those timers made sizable profits trading in PBHG mutual funds. “It’s a large penalty for a firm of this size, one that balances the size of the firm against the amount of the harm and the nature of the conduct to achieve a meaningful but fair consequence to the firm,” Mr. Gabinet said.
In a settlement with the New York Attorney General’s office, Pilgrim Baxter agreed to reduce its management fees by just over 3% during the next five years. That is expected to reduce fees by some US$10 million, according to officials with the attorney general’s office.
“[Pilgrim Baxter] has agreed to a fair settlement and promised continuing cooperation in the investigation of misconduct by its founders,” New York Attorney General Eliot Spitzer said in a statement. “This agreement helps investors who were harmed by improper conduct and allows the company to begin the process of restoring its integrity.”
In a letter to shareholders, Pilgrim Baxter President and Chief Executive David J. Bullock called the settlement “an important milestone.” His letter stressed the firm’s cooperation with investigations by the SEC and the New York Attorney General’s office and touted the new governance policies.
“Our priority throughout this process, during which we’ve worked in close cooperation with regulators, has been to ensure that [shareholder] interests are protected,” Mr. Bullock wrote. “We believe these agreements, along with the other measures we’ve taken in recent months, bring significant long-term benefits to shareholders of the PBHG funds.”
In settling Pilgrim Baxter officials did not admit or deny any of the findings by the SEC or Mr. Spitzer’s office.
Pilgrim Baxter is the latest mutual fund firm to settle allegations of market timing. Also announcing similar settlements in recent months, Strong Capital Management Inc., Menomonee Falls, Wis., its founder Richard S. Strong and two senior executives agreed in May to pay collectively US$140 million in restitution and civil penalties, plus the firm agreed to cut its management fees by US$35 million over five years.
Bank of America Corp., Charlotte, N.C., and FleetBoston Corp., Boston, struck separate settlement agreements in March totaling US$515 million, and Bank of America vowed to cut its management fees by US$160 million over five years.
Contact Robert F. Keane with questions or comments at: