– Pilgrim Baxter & Associates (search) has agreed to a $100 million settlement in an improper mutual fund trading case and will cooperate with authorities' investigations into the company's co-founders, the New York attorney general's office said Monday.
The Wayne, Pa.-based fund complex will return $40 million to injured investors and pay $50 million in civil penalties under the terms of a deal also involving the Securities and Exchange Commission (search).
In an agreement only involving the state of New York, PBA said it would reduce management fees by 3.16 percent over a five-year-period, a $10 million reduction.
PBA chief executive David J. Bullock said the agreement was in the best interest of shareholders and would allow it to move ahead with its "core mission of managing money and serving investors." PBA's parent, London-based Old Mutual, said a new, stricter ethics code and other reforms would help prevent future abuses.
The company had been accused of allowing certain clients to market-time their mutual funds, despite policies to the contrary. Market timing, a type of quick, in-and-out-trading, is not illegal but prohibited by many funds because it tends to skim profits from long-term shareholders. Regulators say funds that allowed selective market-timing committed fraud.
The settlement does not include the company's co-founders, Gary L. Pilgrim (search) and Harold J. Baxter, who are still under investigation. Both men were accused by state and federal regulators, along with the company,of improper trading of their funds to benefit themselves and friends at the expense of longer-term shareholders.
"PBA has agreed to a fair settlement and promised continuing cooperation in the investigation of misconduct by its founders," New York Attorney General Eliot Spitzer (search) said. "This agreement helps investors who were harmed by improper conduct, and allows the company to begin the process of restoring its integrity."
The law firm representing Harold Baxter said it had not seen the settlement and had no immediate comment. Gary Pilgrim's lawyer did not immediately return a call seeking comment.
Baxter and Pilgrim resigned from PBA in November, a week before regulators filed their charges. At the time, the company said the resignations were appropriate because of "conduct that was not, in our view, consistent with the highest standards of professional and ethical behavior."
This is the latest development in the scandal that rapidly spread across the fund industry that long prided an untarnished reputation. Dozens of fund companies have been subpoenaed by the SEC, the states of Massachusetts and New York and other regulators amid reports of widespread improper trading. A handful of agreed to multimillion dollar settlements to resolve accusations of wrongdoing, including Alliance Capital Management and Bank of America.
The PBA case was notable because the company's two principals were implicated, rather than lower-level executives or traders, and were directly accused of facilitating and participating in the alleged wrongdoing.
Company documents showed that "at least as early as 1998, PBA recognized the negative impact associated with excessive short-term trading, or market timing," the SEC said Monday.
The agency said the fallout from the market timing was "exacerbated by the self-dealing of its principals and founders, Gary L. Pilgrim and Harold J. Baxter."
The SEC also said PBA permitted a hedge fund in which Pilgrim invested to engage in rapid trading of the PBHG Growth Fund, which Pilgrim himself managed. Additionally, the company allowed a hedge fund managed by one of Pilgrim's friends to get a monthly look at its portfolio, the SEC alleged — a privilege not given to other shareholders.