Announced Wednesday in separate statements from New York state Attorney General Eliot Spitzer and the US Securities and Exchange Commission , the agreement covers PBHG founders Gary Pilgrim and Harold Baxter.
The settlement resolves allegations that the two men secretly facilitated market timing arrangements with favored clients while PBHG prospectuses sharply limited shareholders’ abilities to trade in and out of the funds, regulators said (See SEC Slaps PBHG Founders With Lawsuit ). Under the pact, Pilgrim and Baxter will each pay $60 million in disgorgement and $20 million in civil penalties. This $160 million will be combined with the $90 million paid by Pilgrim, Baxter & Associates, Ltd. (PBA) in July 2004 and ultimately will be distributed to injured investors, the SEC said.
“As founders of a company that bore their names, Mr. Pilgrim and Mr. Baxter should have set an example of integrity and fair play,” Spitzer said in his statement. “Instead, they were at the center of improper conduct that deceived and harmed their clients.”
Investigations by state and federal regulators revealed that the defendants permitted certain hedge funds and others to market time in the PBHG family of mutual funds, against the express restrictions of the applicable prospectuses, according to the press releases. Entities permitted to time the PBHG funds included a hedge fund in which Pilgrim had a substantial interest and clients of a New York-based brokerage firm owned by a close friend of Baxter.
According to the regulators’ statements, the investigation also revealed that Pilgrim Baxter & Associates (PBA) – the investment adviser for PBHG funds, now known as Liberty Ridge Capital – selectively disclosed the portfolio holdings of certain PBHG funds to facilitate hedge fund market timing strategies in PBHG funds.
Spitzer’s statement said that to date, the investigation into the mutual funds industry has resulted in $1.17 billion in restitution to investors, $821 million in civil penalties, and $925 million in anticipated reductions in mutual fund fees over five years. The probe has focused largely on market timing and late trading as well as certain sales practices.