Washington, D.C., Nov. 17, 2004 – LAWFUEL – SEC, law, legal, attorney, law firm news – The Securities and Exchange Commission today announced the settlement of charges concerning undisclosed market timing against Harold J. Baxter and Gary L. Pilgrim in the Commission’s pending action in federal district court in Philadelphia.
The settlements involve the dismissal of the district court action, and the entry of Commission Orders instituting settled administrative and cease-and-desist proceedings. Based on the findings in those Orders, Baxter and Pilgrim must each pay $80 million – $60 million in disgorgement and $20 million in civil penalties. This $160 million will be combined with the $90 million paid by Pilgrim, Baxter & Associates, Ltd. (PBA) in July 2003 and ultimately will be distributed to injured investors.
Baxter and Pilgrim also consented to orders to cease and desist from committing and/or causing the violations set forth below; to cooperate in ongoing investigations; and to broad restrictions on any future employment in the securities industry, including bars from association with any investment adviser, investment company, or transfer agent.
Stephen M. Cutler, Director of the SEC’s Division of Enforcement, said, “The amounts being paid in this settlement are virtually unprecedented for individuals in civil cases. Along with the permanent bars, the monetary sanctions we have obtained here reflect the severity of the misconduct and the fundamental breach of duty at issue in this case.”
Ari Gabinet, District Administrator of the Philadelphia District Office, said, “With Harold Baxter’s and Gary Pilgrim’s $160 million being added to the firm’s $90 million settlement fund, we are able to make significant restitution to PBHG fund shareholders. The settlement is also notable for the severity of the remedies to which they have agreed. These two pillars of the industry betrayed the trust of the people and institutions that relied on them and put their own interests ahead of the interests of shareholders.”
The Commission Orders find, among other things, that
* Beginning in at least 1996, prospectuses of the PBHG Funds, signed by Baxter, Pilgrim, and other officers on behalf of the PBHG Funds and filed with the Commission, disclosed that investors would be permitted to make no more than four exchanges per year into the PBHG Cash Reserves Fund from any other PBHG fund.
* From 1998 through mid-2001, PBA, under the leadership of Baxter and Pilgrim, permitted more than two dozen accountholders in PBHG funds to conduct short-term trading of PBHG funds through the PBHG Cash Reserves Fund that was far in excess of the disclosed limitation of four exchanges per year.
* Market timers made significant profits from June 1998 through December 2001. Additionally, PBA earned advisory fees on these timers’ funds and Pilgrim and Baxter reaped multi-million dollar profits from, among other things, the sale of their respective interests in PBA revenue. Meanwhile, numerous other investors in PBHG funds generally experienced a decline in the value of their investments.
* In August 2001, PBA terminated the activity of many timers. Nevertheless, it permitted customers of a New York brokerage firm run by a friend of Baxter, as well as additional accounts affiliated with a friend of Pilgrim, to continue market timing certain PBHG funds through December 2001.
* In 1995, Pilgrim, who, in addition to his other positions, managed the PBHG Growth Fund, invested in a hedge fund that was managed by a friend. In March 2000, this hedge fund, with the knowledge and permission of Pilgrim, and contrary to the PBHG Funds’ disclosed policies, began market timing, among other PBHG funds, the PBHG Growth Fund. Over the next 20 months, this hedge fund engaged in approximately 120 short-term exchange transactions in PBHG funds. >From March 2000 to December 2001, the hedge fund’s short-term trading strategy in the PBHG Funds generated a profit of approximately $9.9 million. Pilgrim’s share of the hedge fund’s realized profits during that time period was between $3.7 and $4 million. The PBHG Growth Fund reported losses of nearly 23% and 34% in 2000 and 2001, respectively.
* In 1998, at Baxter’s direction, PBA began providing 30-day stale, material, and non-public portfolio holdings of certain PBHG funds to Baxter’s friend, the President of a New York brokerage firm. PBA continued to provide this information to the President of the New York brokerage firm through September 2003. The President of the New York brokerage firm provided this information to his firm’s customers, who used the information to market time the PBHG Funds and to exercise hedging strategies through other financial and brokerage institutions.
The Commission finds that Baxter willfully violated 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 Section 34(b) of the Investment Company Act of 1940; and willfully aided and abetted PBA’s violations of Sections 204A, 206(1) and 206(2) of the Advisers Act. The Commission further finds that Pilgrim willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Section 34(b) of the Investment Company Act of 1940. Pilgrim and Baxter consented to the entry of the Commission’s Orders without admitting or denying the findings.
The Commission’s efforts in this matter have been coordinated with the Office of the New York Attorney General, which is today announcing settlement of its pending claims against Baxter and Pilgrim.