TRENTON – Attorney General Peter
C. Harvey today filed suit against Allianz
Dresdner Asset Management of America LP
("ADAM") – the parent of
the PIMCO mutual fund group, one of the
nation's largest mutual fund families
– and three affiliated fund companies,
charging that the defendants defrauded
mutual fund investors by agreeing to permit
a major investor to market time, at any
given moment, up to $100 million in PIMCO
mutual funds in violation of fund policies
and to the detriment of ordinary investors.
The
complaint, filed today in Superior Court
in Essex County by Harvey and New Jersey
Bureau of Securities Chief Franklin L.
Widmann, charges that the defendants entered
market timing agreements with Canary Capital
Partners LLC, Canary Investment Management
LLC and related entities, all of Secaucus,
N.J. (collectively "Canary"),
in exchange for large static investments
in certain funds, so-called "sticky
assets," which generated substantial
fees and other income for the defendants.
The
complaint alleges numerous violations
of the New Jersey Uniform Securities Law
and seeks disgorgement of illegal profits,
restitution for investors and civil monetary
penalties. It also names as defendants
PEA Capital LLC (which until last week
was known as Pimco Equity Advisors LLC)
("PEA"), Pacific Investment
Management Company LLC ("PIMS")
and Pimco Advisors Distributors LLC ("PAD").
"New
Jersey residents work hard for their money,"
said Governor James E. McGreevey. "When
they invest to save for retirement or
college for their children, they're entitled
to a deal that is completely fair and
above board. By making special deals with
a big investor to boost their own returns,
these mutual fund companies harmed other
investors. My administration is committed
to stopping such schemes and protecting
New Jersey consumers."
"PIMCO's
management stacked the deck in favor of
Canary, dealing a losing hand to ordinary,
long-term investors," said Attorney
General Harvey. "The defendants stopped
at nothing to increase their assets under
management and fatten their fees, including
violating their own policies prohibiting
market timing. Investors had a right to
rely on those policies, which were clearly
stated in fund prospectuses. We'll fight
to ensure that investors get a fair and
honest deal."
"The
Bureau of Securities worked hard to investigate
these fraudulent deals and to uncover
the series of market timing transactions
that resulted," said Securities Chief
Widmann. "These defendants knew that
market timing was bad for the funds –
their own prospectuses stated as much.
Nonetheless, they proceeded to advance
the interests of Canary to the detriment
of other investors."
Market
timing involves frequent "in and
out" trades of mutual fund shares
to exploit market conditions and inefficiencies
in the way mutual funds are priced. Mutual
fund shares are priced once a day at 4
p.m. EST based on the closing prices of
the securities in the fund's portfolio.
Thus, for example, market timers can take
advantage of good news affecting foreign
stocks that is announced after foreign
stock exchanges close. The stocks in question,
and mutual funds that hold them, are fixed
at artificially low prices. The market
timer can simply buy shares of an underpriced
mutual fund, and turn a quick profit after
prices respond the next day.
Effective
market timing dilutes the value of the
fund by allowing the timer to siphon short-term
profits from what is otherwise a long-term
investment vehicle. It also can add to
transactional costs of the fund and make
it difficult for fund managers to manage
assets effectively.
The
mutual funds at issue in this lawsuit
had policies, spelled out in their prospectuses,
of policing and stopping those transactions
identified as instances of market timing.
In addition, all of the PIMCO prospectuses
had specific limits on the frequency with
which an investor could make so-called
"round trips," defined as each
time an investor purchased shares of a
particular fund, sold them, then repurchased
shares of the same fund.
Between
2000 and 2003, PEA, through PAD, sent
out more than 700 stop notifications and
emails, identifying nearly 1,700 instances
of market timing that were halted. But
individuals charged with policing market
timing were instructed by PIMCO officers
to turn a blind eye to Canary's transactions,
according to the complaint. Further, the
defendants permitted Canary to greatly
exceed the limits on round trips through
its market timing transactions.
The
complaint alleges that during the period
of roughly 1 ½ years in which the
defendants permitted Canary to market
time the funds, Canary made more than
200 market timing transactions, totaling
more than $4 billion in purchases and
redemptions.
The
complaint also alleges that the defendants
provided Canary with additional information,
not disclosed to other investors, on the
specific holdings of the mutual funds.
That information put Canary in a unique
position to engage in market timing transactions
and to hedge their investments.
"The
defendants bent over backwards to help
this big investor profit at the expense
of ordinary investors who entrusted their
hard-earned savings to them," said
Attorney General Harvey.
Chief of Enforcement Richard Barry and
Regulatory Attorneys Israel Grafstein
and Ethan Silver of the Enforcement Section
of the Bureau of Securities conducted
the investigation. Deputy Attorneys General
Victoria Manning and Anna Lascurain are
handling the case for the Attorney General.
The
complaint alleges specifically that from
the end of 2001 through at least May 2003,
PEA, and later PIMS, engaged in two separate
fraudulent schemes with Canary, which
benefitted the defendants, Canary and
their intermediaries at the expense of
mutual fund investors.
The
first scheme involved a market timing
agreement that PEA entered with Brean
Murray, Inc., a New Jersey registered
broker-dealer, on behalf of Canary. The
agreement allowed Canary $100 million
of timing capacity in certain PIMCO funds
in exchange for placing a total of $25
million in sticky assets in a separate
fund, the complaint alleges. As a result,
Canary was permitted to make four round
trips per month in each of the funds involved,
despite the fact that the fund prospectuses
indicated that investors were limited
to six round trips per year, according
to the complaint. In fact, the complaint
states, Canary made five round trips some
months. The complaint alleges that through
this scheme, ADAM, PAD and PEA defrauded
investors of the PEA Target, Opportunity,
Growth and Select Growth funds.
An
email sent to Brean Murray on May 17,
2002, by Kenneth Corba, the CEO of PEA,
complained, "We are monitoring our
agreed upon maximum of 4 round trips per
month. The pattern that is most disturbing
to me is that you only seem to be interested
in being in our funds for a day or two
at a time – perhaps the most opportunistic
but extreme form of market timing that
I have ever seen."
Nonetheless,
the market timing transactions continued
for another year, according to the complaint.
The
second scheme involved a subsequent market
timing agreement negotiated with PIMS
by a consultant that ultimately allowed
$80 million of market timing capacity
in certain funds, with up to 12 round
trips a year, in excess of the limit set
forth in the prospectuses for the funds.
The complaint alleges that ADAM and PIMS
entered this agreement in anticipation
of large investments and substantial fees.
They are alleged to have defrauded investors
in the PIMS High Yield and Real Return
funds.
