Ex-officials of fund group taking SEC to court

Your Money

September 19, 2004|By Tom Petruno

There have been many players in the mutual fund industry scandal that erupted a year ago, but basically just one script: Regulators investigate and bring charges, and the accused settle by agreeing to pay large fines and change their ways - without admitting or denying guilt.

Now, two former executives of the Pimco mutual fund group have decided against following the script. They want to force the Securities and Exchange Commission to prove, in federal court, that they broke the law.

It's a high-stakes gamble for the two men, Stephen J. Treadway and Kenneth W. Corba. By choosing to fight the government, they risk facing harsher penalties - if found guilty - than if they were to settle as have most of their industry peers.

Going to court also would be a gamble for the SEC, which almost never is forced to take its cases that far.

In the agency's yearlong investigation of fund industry practices, it has been able to use its discretion in bringing charges against some fund executives while leaving others un-blemished. In other words, although the SEC always names a fund company when it alleges wrongdoing, it may or may not name people at a company.

Similarly, the fines the SEC has assessed against fund companies and individuals have been all over the map. More than a few securities lawyers have wondered how regulators are arriving at the numbers.

In a trial, a judge or jury could decide whether the SEC has been accurately interpreting gray areas of securities law in the varied civil judgments it has brought regarding allegedly improper or illegal fund practices.

The SEC also could be forced to address, at least on some level, the basic issue of fairness in its judgments.

"It's an excellent question: How has the SEC made its charging decisions?" said Jacob Frenkel, a former SEC enforcement attorney who is a partner at Smith Gambrell & Russell in Washington. "There's only one body that knows the answer to that, and that's the SEC."

For the highly profitable fund companies that have been implicated in the scandal, paying $20 million or $200 million might be less important than simply putting an end to bruising headlines.

For the individual executives charged, however, fairness isn't some throwaway issue. Their careers often are ruined the instant they are named in an SEC lawsuit.

The SEC said Monday that a group of firms affiliated with Pimco funds agreed to pay $10 million in restitution and a $40 million penalty to settle charges that they allowed a hedge fund to engage in market timing.

The SEC's allegations centered on decisions made at PEA Capital, which manages the Pimco stock funds, and at PA Distributors, a Pimco arm that oversaw retail mutual fund sales.

Corba, 51, was chief executive of PEA Capital in New York until he resigned in April. Treadway, 56, was chief executive of PA Distributors in Stamford, Conn., until he left in July.

The SEC's lawsuit, filed in May, accused the Pimco units and the two executives of defrauding their fund investors by allowing a favored client to engage in market timing of certain stock funds from February 2002 to April 2003.

Market timing - fast-paced trading that can siphon profits away from longer-term fund investors - isn't illegal. But if a fund company quietly allows it for some investors, while banning others from the same practice, it can constitute fraud, according to the SEC.

The Pimco case differs from others involving alleged market-timing deals in that the Pimco executives are accused of allowing just one investor - hedge fund Canary Capital Partners - to make short-term trades.

Regulators have accused some fund companies of practically beating a path to the doors of dozens of wealthy clients, inviting them to become timers.

Attorneys for Corba and Treadway don't dispute that Canary had a trading arrangement with Pimco funds. But in filings over the past few weeks in federal court in New York, the attorneys maintain that their clients broke no laws and that therefore the SEC had no basis on which to charge them with fraud.

Tom Petruno is a staff writer for the Los Angeles Times, a Tribune Publishing newspaper.

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