PEA Capital, formerly known as PIMCO Equity Advisors, was charged in February by New Jersey regulators who alleged the firm allowed improper trading arrangements to be conducted in its funds (See PIMCO Hit with Garden State Trading Suit ). In the GardenState’s complaint, it is alleged that PEA had policies to police and stop market timing, but it said the defendants named in the complaints were told to ignore the hedge fund in question executing the questionable trades, according to a Reuters report.
It is those allegations, and the evidence New Jersey submitted, that Morningstar is focusing on, calling them “extremely troublesome.” Before selling, however, Morningstar encouraged investors to read the complaint, weigh potential commission and tax costs and decide if on selling, they would lose access to an important asset class.
In particular, Morningstar is troubled by PEA’s claims that Canary Capital Partners LLC – the hedge fund at the heart of the probe by New York Attorney General Eliot Spitzer that has touched off the tsunami of market timing and late trading allegations(See Spitzer Fund Abuse Probe Pumps Out More Subpoenas ) – pulled a fast one on the company. Morningstar said it believes that Kenneth Corba, PEA’s chief investment officer and a portfolio manager, clearly put the interests of his company ahead of investors.
“Until the firm takes steps to dispel the doubts that this episode has cast over PEA’s commitment to shareholders, investors are better off taking their business elsewhere,” Morningstar said.
At the same time, Morningstar said it would notchange its favorable opinion of PIMCO’s fixed income unit headed up by fixed income guru Bill Gross. PIMCO Advisors and PEA Capital are owned by German insurer Allianz AG, and are affiliated with Pacific Investment Management Company LLC, which manages some of the best-known fixed-income funds in the United States.