SEC Adds PEA Capital to Market Timing List

February 13, 2004 (—The US Securities and Exchange Commission (SEC) is considering enforcement action related to market timing against PEA Capital LLC, the company that manages funds with the PIMCO Funds name, Dow Jones reported.

PEA Capital is separate from Pacific Investment Management Co., or PIMCO, although both companies are part of German insurer Allianz AG and sell PIMCO funds.  the fifth-largest mutual-fund complex in the country .

PEA, was formerly known as PIMCO Equity Advisors and was created in 1999 as a firm focusing on growth-style investing.

PEA said in its statement that it told the SEC and other regulators that it had allowed market timing by Canary Capital Partners LLC, a hedge fund that was implicated early on in the market timing investigation and PEA also outlined what information it had given regulators, according to Dow Jones.

Bad Timing

The case involves Edward Stern, founder of Canary Capital Partners LLC, a hedge fund at the center of industrywide probes, who allegedly misled the fund advisers into allowing improper trading.  According to Reuters, Stern contacted the two New York-based PIMCO advisers and expressed interest in both a long-term and momentum-based investment strategy, and at no time indicated he would engage in the practice of market timing.   Many mutual fund prospectuses forbid it, but the three equity funds in which Canary Capital engaged in market timing (PIMCO PEA Growth fund, PIMCO PEA Target and PIMCO PEA Opportunity funds) say only they would eliminate market timing if it were deemed detrimental to fund shareholders.

Stern made less than $1 million in one of the funds, PIMCO PEA Growth fund, but lost much more in trading in the PIMCO PEA Target and PIMCO PEA Opportunity funds, according to Reuters, citing Phil Neugebauer, a spokesman for PIMCO Advisors.

“PEA Capital does not actively solicit market timing,” Neugebauer said. “This instance shouldn’t be painted with the same brush as those firms who made it part of their core business strategy.”

Stern, who began trading in the three funds in the first quarter of 2002, did not invest any “sticky” assets with the three funds, Neugebauer said. Stern stopped his trading activity in October 2002, after PEA Capital instructed him to do so.   A PEA investigation found no instances of late trading, which is illegal, and no instances of employee market timing were found, according to a  statement posted on PIMCO Advisors website Friday.

In that statement, PIMCO Advisors noted that “our findings indicate that the investor actually lost money on his overall investment. Two independent accounting firms, one selected by the Funds’ independent trustees, determined that only one of the three Funds—PEA Growth—was impaired by the investor’s activity, and only by an immaterial amount (less than $1 million, according to Reuters).

PIMCO Advisors said it believes PEA Capital was well ahead of the curve in stopping inappropriate market timing. 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.