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Portfolio > Mutual Funds

PIMCO Settles with SEC

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WASHINGTON ( Fund Management LLC, PEA Capital LLC and PA Distributors LLC agreed Monday to settle charges they allowed market timing in PIMCO Funds Multi-Manager Series mutual funds.

The three firms, which used to share the PIMCO name but have been rebranded, collectively will pay US$40 million in civil penalties and return to investors an additional US$10 million in profits gained through the timing arrangements. The money will be placed in a fund and distributed to mutual fund shareholders harmed by the timing arrangements.

SEC officials credited the three firms with US$1.6 million they already had paid to PIMCO Funds as restitution.

As part of the settlement, the firms also agreed to censures, cease-and-desist orders and said they would revamp their governance procedures to ensure similar market timing does not occur in the future. None of the firms admitted or denied the SEC’s findings, which included that all three firms helped hedge fund Canary Capital Partners LLC, Secaucus, N.J., conduct some US$4 billion worth of market-timing transactions in Multi-Manager Series mutual funds.

“The principle here is a simple one-it’s illegal for a mutual fund adviser to share non-public portfolio information with a favored investor or to enter into a secret, lucrative arrangement to permit a favored investor to engage in market timing,” said Randall R. Lee, regional director for the SEC’s Pacific Regional Office in Los Angeles. “That’s exactly what the PIMCO Entities did, and this US$50 million settlement reflects their serious breach of trust.”

Market timing itself is not illegal, however, many mutual fund companies say in their prospectuses that they discourage the practice and some claim to prohibit it. It is the disconnect between these promises to ordinary investors and the market-timing deals cut with institutional investors that have been the focus of investigations by the SEC, the New York State Attorney General and other state law enforcement officials.

SEC officials said the findings of their investigation into PA Fund Management, PEA Capital and PA Distributors revealed that between February 2002 and April 2003, the three firms provided Canary Capital with as much as US$60 million in timing capacity in return for long term investments by Canary of US$27 million in an equity mutual fund and a hedge fund run by PA Fund Management and PEA Capital. Both firms earned management fees from the funds, and Canary’s additional commitment raised the amount of fees the two PA Fund Management and PEA Capital collected, SEC officials said.

The prospectuses for the mutual funds in which Canary was granted timing capacity did not disclose the Canary arrangement and, furthermore, “gave the misleading impression that the PIMCO mutual funds discouraged or limited timing,” according to the SEC complaint.

Even as Canary conducted more than 100 round-trip trades in PIMCO’s mutual funds-sometimes with knowledge gained from non-public portfolio holdings that PA Fund Management, PEA Capital and PA Distributors shared with Canary’s broker-dealer-PA Distributors prevented timing by other investors by sending warning letters, freezing accounts and blocking trades.

PEA Capital and PA Distributors in June settled market-timing charges filed by the New Jersey State Attorney General.

SEC officials said as part of the settlement they would seek dismissal of federal lawsuits against the firms. However, civil cases against Stephen J. Treadway, former chief executive of PA Fund Management and PA Distributors and former PIMCO Funds board chairman, and Kenneth W. Corba, former chief executive of PEA Capital, are ongoing.

Although the SEC settlement refers to the three firms as “the PIMCO Entities,” Pacific Investment Management Co. LLC, the well-known US$390 billion bond manager, was not implicated in the market-timing charges filed in May by the SEC.

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Contact Bob Keane with questions or comments at: [email protected].


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