SEC Files Civil Fraud Charges Against PIMCO
PAFM is an investment adviser for the PIMCO Funds: Multi-Manager Series, PEA is the investment sub-adviser for several of the PIMCO Funds, and PAD is a broker-dealer that serves as the distributor for the PIMCO Funds.
Stephen M. Cutler, Director of the SEC's Division of Enforcement, said, "This action represents yet another example of a well-known mutual fund adviser placing its own interests above those of the fund shareholders through an undisclosed market timing arrangement. Our action seeks to hold accountable all those responsible for this betrayal of trust - including, most significantly, PIMCO's senior management."
Randall R. Lee, Director of the SEC's Pacific Regional Office in Los Angeles, added, "Even as they represented to ordinary investors that short-term and excessive trading was not allowed in the PIMCO equity funds, these defendants entered into a secret agreement permitting a single favored investor to engage in just that type of trading - a privilege that was denied to hundreds of other investors. Quid pro quo deals like this have no place in the mutual fund business, and mutual fund families, and the individuals who run them, cannot betray their investors' trust in this manner."
The SEC's complaint, filed in United States District Court in Manhattan, alleges as follows.
- "Market timing" refers to the practice of short term buying and selling of mutual fund shares. From February 2002 to April 2003, the PIMCO Funds' advisers provided "timing capacity" in their mutual funds to Canary in return for long-term investments (referred to as "sticky assets") in a mutual fund and a hedge fund from which PAFM and PEA earned management fees. The prospectuses for the mutual funds failed to disclose to investors that an agreement had been made to permit timing in the funds in exchange for sticky assets. In addition, the prospectuses also gave the misleading impression that the PIMCO mutual funds discouraged timing.
- At the height of the agreement, Canary used over $60 million in timing capacity in several different mutual funds and invested $27 million in sticky assets into a mutual fund and a hedge fund. Even as it allowed Canary to engage in this market timing activity, the distributor of the PIMCO Funds, PAD, simultaneously prevented numerous other shareholders from engaging in the same rapid trading as Canary by issuing warning letters, freezing accounts, or blocking trades. For instance, in 2002 PAD froze nearly 400 accounts because of market timing or frequent trading in those accounts. Finally, PEA disclosed nonpublic portfolio holdings to the broker-dealer that executed Canary's trades.
- Stephen J. Treadway, age 56, of New York, N.Y., the CEO of PAFM and PAD as well as the chairman of the board of trustees for the PIMCO Funds: Multi-Manager Series, approved the market timing arrangement in approximately January 2002 but did not disclose his knowledge of the arrangement to the board of trustees until approximately September 2003.
- Kenneth W. Corba, age 51, of Greenwich, Conn., the former CEO of PEA, negotiated and approved the timing and sticky asset arrangement with Canary. He was the portfolio manager for the PIMCO Growth Fund, which provided Canary with $30 million in market timing capacity, and for the PIMCO Select Growth Fund, which received $25 million in sticky assets from Canary.
PAFM, PEA, PAD, Treadway, and Corba are charged with violating, or aiding and abetting violations of, the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. PAFM, PEA, Treadway, and Corba are further charged with violations of Section 34(b) of the Investment Company Act of 1940 for making false and misleading portfolio disclosures. PAFM, PEA, and PAD are also charged with violating Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder for participating in joint transactions raising a conflict of interest. Finally, PAFM and PEA are charged with violations of Section 204A of the Advisers Act for failing to have written policies to prevent the disclosure of nonpublic portfolio holdings to Canary's brokers and others.
The SEC is seeking injunctive relief, disgorgement, monetary penalties, and an order pursuant to Section 36(a) of the Investment Company Act preventing the defendants from serving as investment advisers, principal underwriters, officers, directors, or members of any advisory boards to any registered investment company.