SEC going after Pimco

WASHINGTON — Federal regulators accused Pimco Advisors Fund Management, its chief executive and the former head of another company of civil fraud Thursday for allegedly secretly giving a hedge fund special trading privileges in stock mutual funds involving more than $4 billion.

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

Market-timing is a type of frequent "in-and-out" trading that is not illegal but is widely restricted by most mutual funds because it tends to skim profits from other shareholders.

Pimco is the latest investment complex to be swept up in an industrywide scandal that began last fall when New York Attorney General Eliot Spitzer accused Canary of securing special trading privileges at several big-name mutual fund companies, including Bank of America, Banc One, Janus and Strong. Since then, Canary, Janus, Bank of America and a handful of other fund companies and executives have agreed to pay hundreds of millions of dollars to settle improper trading cases with regulators.

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

The SEC recently proposed that the separation be mandated for all mutual fund companies — a change that would require the boards of an estimated 80 percent of U.S. funds to replace their chairmen.

In the lawsuit filed Thursday in federal court in Manhattan, the SEC is seeking unspecified civil fines and restitution from Pimco Advisors Fund Management, PEA Capital, Pimco Advisors Distributors, and Stephen Treadway, the chief executive officer 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.

"We are disappointed the SEC chose to take this action now and we look forward to completing settlement discussions with the SEC, which have been under way, so we can achieve a prompt and equitable resolution to this matter," PEA Capital said in a statement issued late Thursday.