SEC sues 2 Pimco funds firms over trades

Current, former CEOs are named in suit tied to deals given to hedge fund

May 07, 2004|By BLOOMBERG NEWS

NEW YORK - PEA Capital LLC, the New York firm that manages seven Pimco mutual funds, was sued by the Securities and Exchange Commission yesterday for allowing a hedge fund to make frequent trades that allegedly hurt returns of other investors.

PEA Capital, a stock fund unit of Allianz Group that manages $12.5 billion in assets, let the Canary Capital Partners LLC hedge fund make $4 billion in so-called market timing trades, the SEC said in a 25-page complaint.

The SEC also sued PEA Capital's former chief executive, Kenneth W. Corba, 51, and Stephen Treadway, 56, head of Pimco Advisors Distributors LLC, which sold the funds, and Pimco Advisors Fund Management LLC, PEA's parent.

"The misconduct of firms stems from the actions of individuals, and here we allege that the misconduct started right at the top," said Randall R. Lee, director of the SEC's Los Angeles office.

The SEC's lawsuit didn't target Pimco's bond fund unit, which oversees $394.7 billion and is led by William H. Gross, chief investment officer. In February, New Jersey Attorney General Peter C. Harvey sued PEA Capital and Gross' unit, Pacific Investment Management Co., over Canary Capital's trading.

U.S. regulators have filed complaints against more than a dozen companies for their involvement in improper trading. The yearlong probe of the fund industry has led to $2.1 billion in penalties, restitution and fee cuts paid by Putnam Investments, Bank of America Corp. and four other firms.

The SEC is seeking an order prohibiting PEA Capital, Pimco Advisors, Pimco Distributors and the two company executives from future violations, as well as unspecified financial penalties. Corba, who joined the company in 1995, resigned last month.

Pimco spokesman Phil Neugebauer had no immediate comment. James C. Rehnquist, a lawyer for Corba, declined to comment but said he might have a statement later. Harvey J. Wolkoff, a lawyer for Pimco, PEA and Treadway, referred calls to Neugebauer.

New Jersey's lawsuit is pending. The state is awaiting Pimco's response, which is due today, said Peter Aseltine, a spokesman for the attorney general.

Canary Capital, based in Secaucus, N.J., got permission from Pimco to engage in market timing from February 2002 to April 2003 in return for depositing $27 million into a mutual fund and hedge fund, the SEC alleged. Pimco collected management fees on these "sticky assets," which weren't used for Canary's frequent trades, the agency said.

Corba and Treadway approved the arrangement, the SEC said. At a meeting in January 2002, Corba told Treadway that Canary wanted to make trades that "could potentially run afoul of" Pimco's "market-timing policies," the SEC complaint said. Treadway gave his approval, the complaint said.

Market timing takes advantage of the fact that while mutual fund shares are priced daily at 4 p.m. New York time, the securities the funds own trade continually around the world. Market timers dilute the gains of long-term shareholders by buying on days when fund prices didn't reflect late news and selling the next day when it did, regulators say.

While allowing Canary Capital to make frequent trades, Pimco's fund distributor barred 67 brokers from selling the funds, froze 317 accounts and sent 104 warning letters related to market timing in 2003, according to the SEC.

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