In the first case of a fund company manager being directly charged in relation with illegal trading practices, the founders of the Pilgrim-Baxter fund family were charged by state and federal regulators Thursday with improper trading of their funds to benefit themselves and friends at the expense of longer-term shareholders.

The action by the Securities and Exchange Commission and the New York Attorney General against Gary L. Pilgrim and Harold J. Baxter of Pilgrim Baxter & Associates comes a week after both men were forced out of the company because of the improper trading.

Previously, regulators had taken action against two former Putnam Investments portfolio managers, as well as the firm, but Putnam’s executives were not directly accused.

According to the complaint, the trading arrangements netted more than $13 million in profits, including $3.9 million for Pilgrim alone.

“The top managers of this mutual fund lost their ethical compass and were unable to distinguish between what was in their shareholders interest and their own interest,” New York Attorney General Eliot Spitzer said in a news release.

The two men and their company are charged with committing fraud on federal and state levels, as well as breaching their fiduciary duty to investors. Authorities said they will seek restitution for investors, but did not specify what fines or penalties would be sought.

A call to a Pilgrim Baxter & Associates spokesman seeking comment was not immediately returned.

Last week, when both men resigned, the company said Pilgrim had agreed to turn over personal profits he received from the improper trading. The company also said it would reimburse the fund all management fees it had earned on the partnership’s trades.

According to papers filed Thursday, Pilgrim, his wife and two other partners established the Appalachian Trails hedge fund, which was permitted to conduct extensive in-and-out trading of PBHGs funds — in violation of PBHG rules that limit rapid trading. The practice, known as market timing is not illegal, but widely prohibited because it skims profits from longer-term shareholders.

The charges also allege that clients of Wall Street Discount, a brokerage run by a close friend of Baxter, were provided with non-public information about the portfolio holdings of PBHG funds — a process which facilitated the market timing and generated significant profits for these customers.

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