SEC accuses Pimco, execs of fraud

0 Comments | Oakland Tribune, May 7, 2004 | by Associated Press

WASHINGTON -- Federal regulators on Thursday accused bonds giant Pimco and two of its executives of civil fraud for allegedly secretly giving a hedge fund special trading privileges in its mutual funds involving more than $4 billion.

The Securities and Exchange Commission said Pimco defrauded its mutual fund investors by allowing hedge fund Canary Capital Partners to engage in market timing, frequent "in-and-out" trading to exploit market conditions and prices, of Pimco fund shares from February 2002 to April 2003. The practice is not illegal but is widely restricted by most mutual funds because it often skims profits from other shareholders.

Canary has been at the center of federal and state investigations in mutual fund trading abuses. The industrywide scandal first came to light last fall when New York Attorney General Eliot Spitzer accused Canary of securing such special trading privileges at several big- name mutual fund companies, including Bank of America, Banc One, Janus and Strong.

In its lawsuit filed in federal court in Manhattan, the SEC is seeking unspecified civil fines and restitution from Pimco Advisors Fund Management, PEA Capital, Pimco Advisors Distributors, and Stephen Treadway, the chief executive officer of Pimco Advisors Fund Management and Pimco Advisors Distributors; and Kenneth Corba, the former CEO of PEA Capital.

The SEC also is seeking to have Treadway and Corba barred from serving as investment advisers, officers, directors or members of advisory boards of any mutual fund company.

Representatives of Newport Beach-based Pimco, Treadway and Corba couldn't immediately be reached for comment on the suit.

Pimco executives in February expressed regret for allowing Canary the special trading privileges, but said such activity was limited, proper -- and did not hurt average investors.

In an open letter that appeared as full-page advertisements in several major newspapers, the executives said the alleged improper trades by Canary were "infrequent, did not come close to violating the prospectuses and harmed no shareholders in the fund."

The same month, the New Jersey attorney general's office sued Pimco and its parent company, German insurer Allianz AG, on the same grounds as the SEC suit. In exchange for the special access, Canary made large investments in funds that generated substantial fees and other income for the defendants, the New Jersey suit alleged.