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SEC accuses Pimco firms of fraud in trading probe

By Marcy Gordon
The Associated Press

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The Securities and Exchange Commission said the Southern California investment company and two related companies defrauded its mutual-fund investors by allowing hedge fund Canary Capital Partners to market-time Pimco shares from February 2002 to April 2003.

Market-timing, or frequent "in-and-out" trading, is not illegal, but most mutual funds restrict the activity because it tends to skim profits from other shareholders.

Pimco is the latest to be swept up in an industrywide scandal that began in the fall, when New York Attorney General Eliot Spitzer accused Canary of securing special trading privileges at big-name mutual-fund companies, including Bank of America, Banc One, Janus and Strong.

In the new case, the SEC alleged that Pimco Advisors' CEO, who also was the chairman of a Pimco funds company, approved market-timing deals to enrich the management company at the expense of ordinary investors.

That is a clear example of "why mutual-fund chairmen need to be independent of management," said Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee.

In the lawsuit filed yesterday in federal court in Manhattan, the SEC is seeking unspecified fines and restitution from Pimco Advisors Fund Management, PEA Capital, Pimco Advisors Distributors and Stephen Treadway, the CEO of Pimco Advisors Fund Management and Pimco Advisors Distributors; and Kenneth Corba, the former CEO of PEA Capital.

Pimco Advisors Fund Management recently changed its name to PA Fund Management.

The SEC also is seeking to have Treadway and Corba barred from serving as investment advisers, officers, directors or members of advisory boards of any mutual-fund company.

Spokesmen for Pimco didn't immediately return telephone calls seeking comment, nor did attorneys for Treadway and Corba.

The SEC said Treadway, who also was chairman of the board of trustees for the Pimco Funds Multi-Manager Series, approved the market-timing deal with Canary in early 2002 but failed to disclose it to the trustees until September 2003.
 
Corba, who resigned last month, was the portfolio manager for the Pimco Growth Fund and the Pimco Select Growth Fund, which allegedly received $25 million from Canary in "sticky assets" — other investments Canary made as a condition for the improper trading privileges.

"Even as they represented to ordinary investors that short-term and excessive trading was not allowed in the Pimco equity funds, these defendants entered into a secret agreement permitting a single favored investor to engage in just that type of trading — a privilege that was denied to hundreds of other investors," said Randall Lee, director of the SEC's regional office in Los Angeles.

Pimco executives in February expressed regret for allowing Canary the special trading privileges, but said such activity was limited, proper and did not hurt average investors.