The Securities and Exchange Commission announced that the firms will pay $10 million in disgorgement and a civil penalty of $40 million. The companies also agreed to cease-and-desist orders, censures, and to carry out certain compliance and mutual fund governance reforms.
The affected firms will receive credit against their disgorgement obligation for approximately $1.6 million that they have already 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.
“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, “Stephen Cutler, Director of the SEC’s Division of Enforcement, said in the news release.
According to the SEC:
- the companies provided Canary Capital Partners with at least $60 million in “timing capacity” in their equity mutual funds from February 2002 to April 2003. This was 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 funds’ prospectuses didn’t disclose the market timing arrangement and gave the impression that market timing was frowned upon, the SEC said.
- 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.
- 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.
- PEA disclosed nonpublic portfolio holdings to the broker-dealer executing Canary’s trades.
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