PIMCO Hit with Garden State Trading Suit

February 17, 2004 (PLANSPONSOR.com) - New Jersey regulators have slapped the PIMCO mutual fund group with a lawsuit, accusing it of defrauding investors by allowing a hedge fund at the center of an industrywide scandal to improperly market time in PIMCO's funds.

PIMCO parent Allianz Dresdner Asset Management of America LP and three related companies were accused of allowing hedge fund company Canary Capital Partner   LLC to improperly trade in PIMCO funds, violating numerous securities laws, Reuters reported. The suit seeks return of illegal profits, restitution for investors and monetary penalties.

“The defendants bent over backwards to help this big investor profit at the expense of ordinary investors who entrusted their hard-earned savings to them,” New Jersey Attorney General Peter Harvey said in a statement.

The Garden State’s complaint said PIMCO had policies to police and stop market timing. But it said the defendants named in the complaints were told to ignore Canary, whose trading has been at the center of a continuing investigation of mutual funds in September by New York Attorney General Eliot Spitzer, regulators from other states and the US Securities and Exchange Commission (SEC). Canary paid $40 million to settle charges it engaged in improper trading (See  Spitzer Fund Abuse Probe Pumps Out More Subpoenas ).

The complaint said PIMCO had limits on the frequency an investor could buy and sell a particular fund, or the number of “round trip” trades it would allow. But for about 18 months Canary made more than 200 market timing transactions, totaling more than $4 billion in purchases and redemptions, according to the New Jersey suit.The New Jersey complaint also accused PIMCO of providing Canary with information not disclosed to other investors on the specific holdings of its mutual funds, which put Canary in a unique position to engage in market timing transactions and to hedge their investments, it said.

The PIMCO entities agreed to Canary’s trading in exchange for large static investments in certain funds, or so-called “sticky assets,” which generated substantial fees and other income for the defendants, New Jersey officials said.

Two Schemes

PIMCO was charged with two schemes. The first involved an agreement with New Jersey broker-dealer Brean Murray Inc. on behalf of Canary. The agreement allowed Canary $100 million of timing capacity in certain PIMCO funds in exchange for placing a total of $25 million in sticky assets.

The second involved an agreement that allowed $80 million of market timing capacity in certain funds, with up to 12 round trips a year, outside of what their prospectuses’ state.

The other defendants named in the suit filed in Superior Court in Essex County are PIMCO Advisors Distributors LLC, the sales arm of PIMCO mutual funds, and fund advisers PEA Capital LLC and Pacific Investment Management Co. LLC.

PIMCO said last week that federal regulators may bring an enforcement action against PEA Capital and PIMCO Advisors Funds Management LLC, which wasn’t named in the complaint, over improper trading involving Canary Capital (See  SEC Adds PEA Capital to Market Timing List ).