Washington, D.C., Sept. 13, 2004 LAWFUEL – Best for attorney news, law firms, securities + exchange commission news, legal research – The Securities and Exchange Commission today announced that PA Fund Management LLC (PAFM), PEA Capital LLC (PEA), and PA Distributors LLC (PAD) (collectively, the PIMCO Entities) agreed to a settlement of charges that they defrauded investors in the PIMCO Funds: Multi-Manager Series in connection with an undisclosed market timing arrangement.
Under the settlement, the PIMCO Entities have been ordered to pay $50 million, consisting of $10 million in disgorgement and a civil penalty of $40 million. Without admitting or denying the Commission’s findings, the PIMCO Entities also consented to cease-and-desist orders, censures, and to undertake certain compliance and mutual fund governance reforms.
The PIMCO Entities will receive credit against their disgorgement obligation for approximately $1.6 million that they previously paid to the PIMCO Funds as restitution. The balance of the disgorgement and the entire penalty (approximately $48.4 million) will be distributed to shareholders of the mutual funds affected by the illegal market timing.
Stephen M. Cutler, Director of the SEC’s Division of Enforcement, said, “The settlement we announce today is a resounding victory for mutual fund shareholders: it includes sizeable monetary sanctions; restitution for shareholders of the affected funds; and far-reaching structural reforms.”
Randall R. Lee, Regional Director of the SEC’s Pacific Regional Office in Los Angeles, added, “The principle here is a simple one – it’s illegal for a mutual fund adviser to share non-public portfolio information with a favored investor or to enter into a secret, lucrative arrangement to permit a favored investor to engage in market timing. That’s exactly what the PIMCO Entities did, and this $50 million settlement reflects their serious breach of trust.”
The Commission’s order finds that:
* From February 2002 to April 2003, the PIMCO Entities provided Canary Capital Partners with at least $60 million in “timing capacity” in their equity mutual funds in return for as much as $27 million in long-term investments (referred to as “sticky assets”) in an equity mutual fund and a hedge fund from which PAFM and PEA earned management fees.
* The prospectuses for the mutual funds failed to disclose that an agreement had been made to permit timing in the funds in exchange for sticky assets. In addition, the prospectuses also gave the misleading impression that the PIMCO mutual funds discouraged or limited timing
* From February 2002 to April 2003, Canary made over 100 round-trip exchanges exceeding $4 billion in overall dollar volume in several PIMCO equity funds pursuant to its special market timing arrangement.
* While allowing Canary to engage in this market timing activity, PAD simultaneously prevented hundreds of other account holders from engaging in the same rapid trading as Canary by issuing warning letters, freezing accounts, or blocking trades.
* Finally, PEA disclosed nonpublic portfolio holdings to the broker-dealer executing Canary’s trades.
Based on the conduct outlined above, the Commission’s order finds that the PIMCO Entities willfully violated, or aided and abetted violations of, the antifraud provisions of the Investment Advisers Act of 1940; Section 17(d) of, and Rule 17d-1 under, the Investment Company Act of 1940, which prohibit joint transactions in the absence of a Commission order; and Section 34(b) of the Investment Company Act, which prohibits false or misleading prospectus disclosures. Further, the Commission’s order finds that PAFM and PEA willfully violated Section 204A of the Investment Advisers Act, which requires an investment adviser to have policies and procedures reasonably designed to protect against misuse of material nonpublic information.
In May 2004, the Commission brought civil fraud charges against the PIMCO Entities in United States District Court in Manhattan. Upon the entry of this administrative order, the Commission will seek to dismiss its federal court action against the PIMCO Entities with prejudice.
The Commission’s litigation in federal court continues against Stephen J. Treadway, the former chairman of the board of trustees of the PIMCO Funds and former CEO of PAFM and PAD, and Kenneth W. Corba, the former CEO of PEA.