PIMCO Units Settle Garden State Charges

June 1, 2004 (PLANSPONSOR.com) - Three units of PIMCO, have agreed to pay an $18 million fine to New Jersey state regulators to settle abusive fund trading practices.

The settlement covered parent company Allianz Dresdner Asset Management of America LP as well as subsidiary firms, PA Distributors LLC (formerly known as Pimco Advisors Distributors LLC), and PEA Capital LLC.

“Industry managers must not allow practices that hurt the asset growth of small, long-term investors,” said New Jersey Attorney General Peter Harvey in a news release. “Everyone’s money is important, and the powerful must play by the same rules as the little guy. These three defendants put their own profits and the interests of a single major investor ahead of the interests of ordinary investors in their funds. We will continue to fight for the interests of all investors.”

In February, Harvey  accused defendants of allowing hedge fund Canary Capital Partners to market time shares in PIMCO stock and bond funds (See  PIMCO Hit with Garden State Trading Suit ). The  lawsuit said PIMCO, based in Newport Beach, California, and known formally as Pacific Investment Management Co., allowed Canary to market time several PIMCO Funds in exchange for placing millions of dollars in a separate fund.

The settlement requires the three defendants to pay New Jersey a civil monetary penalty of $15 million as well as $3 million for investigative costs and further enforcement initiatives.

Among the governance changes required by the settlement, Steven Treadway, Chief Executive Officer of PA Distributors, is required to resign as Chairman of the Board of Trustees of the MMS Funds. Kenneth Corba, who allegedly was involved in arranging the Canary market timing arrangement as CEO of PEA, resigned after the filing of New Jersey’s lawsuit (See PIMCO Stock Fund Manager Corba Steps Down ).

Under the  settlement , Allianz will be required to hire an independent counsel, approved by New Jersey, to conduct an annual audit for five successive years beginning in December 2004 to review the implementation of redemption fees, fair valuation procedures and market timing surveillance with respect to the MMS Funds. In addition, the settlement bars any disclosure to third parties of the portfolio holdings of the MMS Funds unless the disclosure is in accordance with Allianz written procedures, as approved by its general counsel, or is required by law or regulation.

All of the issues have been resolved with respect to Pacific Investment Management Company (PIMCO) as well as any of the fixed income funds of the Pacific Investment Management Series of the PIMCO Funds, New Jersey officials  announced . “We have stated publicly from the moment the charges were filed in February that our people have acted in good faith, and that our clients’ interests have been protected,” Bill Gross and Bill Thompson, PIMCO’s chief investment officer and chief executive officer, said in a news release Tuesday.

A May U.S. Securities and Exchange Commission (SEC)  civil lawsuit  against PIMCO didn’t include any charges against PIMCO’s bond group, and people familiar with the SEC’s inquiry said federal officials found no evidence of wrongdoing related to the group during their investigation.

In addition to accusing PIMCO Funds of hurting shareholders by allowing market timing, the SEC’s civil lawsuit also alleged that the chairman of the boards of more than two dozen of PIMCO’s mutual funds and a former portfolio manager defrauded investors.

Canary at the center of the mutual-fund trading scandal, settled civil fraud charges last year with the New York attorney general over improper trading practices. Federal and state regulators have been pursuing a wide ranging investigation focusing on market timing, late trading and certain sales practices.