TRENTON
– Attorney General Peter C. Harvey
announced today that New Jersey will receive
$18 million in a settlement with Allianz
Dresdner Asset Management of America LP
(“ADAM), PA Distributors LLC (formerly
known as Pimco Advisors Distributors LLC)
(“PAD”), and PEA Capital LLC
(“PEA”) regarding a fraudulent
arrangement that permitted a major investor
to market time more than $4 billion in
transactions in mutual funds of the defendants
in violation of fund policies and to the
detriment of long-term investors. It will
be the largest penalty ever collected
by New Jersey in a securities case.
The
settlement is set forth in a Consent Order
and Final Judgment, attached to this release,
which was filed today in Superior Court
in Essex County by the Attorney General
and Bureau of Securities Chief Franklin
L. Widmann. The settlement stems from
allegations that the three defendants
entered a market timing arrangement with
Canary Capital Partners LLC of Secaucus,
N.J., and related entities, (collectively
“Canary”), in exchange for
large, long-term investments of “sticky
assets” which generated substantial
fees and other compensation for the defendants.
It requires defendants to implement governance
changes to ensure that portfolio managers
for their mutual funds, including the
Multi-Manager Series (“MMS Funds”),
function independently of business managers
and that the funds comply with their own
policies barring market timing.
“My
administration has made consumer protection
a top priority,” said Governor James
E. McGreevey. “We are fighting fraud,
whether it’s securities fraud, insurance
fraud, or fraud in the retail and service
industries. This record-setting securities
settlement is another example of how we
are taking strong legal action to ensure
that when New Jersey residents spend their
hard-earned money and invest for the future,
they get an honest deal.”
“Industry
managers must not allow practices that
hurt the asset growth of small, long-term
investors,” said Attorney General
Harvey. “Everyone’s money
is important, and the powerful must play
by the same rules as the little guy. These
three defendants put their own profits
and the interests of a single major investor
ahead of the interests of ordinary investors
in their funds. We will continue to fight
for the interests of all investors.”
New
Jersey dismissed its action against Pacific
Investment Management Company LLC. All
of the issues have been resolved with
respect to Pacific Investment Management
Company as well as any of the fixed income
funds of the Pacific Investment Management
Series of the PIMCO Funds. Bill Gross,
Chief Investment Officer of this multi-billion
dollar fund complex, was not named personally
in New Jersey’s suit. Pacific Investment
Management Company is not a part of any
of the penalties of the Consent Order
involving ADAM, PAD and PEA.
“Mr.
Gross has demonstrated in his public statements
that he shares our view about protecting
the integrity and health of his fixed-income
funds,” said Attorney General Harvey.
The
settlement requires ADAM, PAD and PEA
to pay New Jersey a civil monetary penalty
of $15 million as well as $3 million for
investigative costs and further enforcement
initiatives. The settlement document refers
to the fact that PEA reimbursed the MMS
Funds $1.6 million in connection with
Canary’s market timing activity
immediately after New Jersey filed suit.
Among
the governance changes required by the
settlement, Steven Treadway, Chief Executive
Officer of PAD, is required to resign
as Chairman of the Board of Trustees of
the MMS Funds. Kenneth Corba, who allegedly
was involved in arranging the Canary market
timing arrangement as CEO of PEA, resigned
after the filing of New Jersey's lawsuit.
Under
the settlement, ADAM will be required
to hire an independent counsel, approved
by New Jersey, to conduct an annual audit
for five successive years beginning in
December 2004 to review the implementation
of redemption fees, fair valuation procedures
and market timing surveillance with respect
to the MMS Funds. In addition, the settlement
bars any disclosure to third parties of
the portfolio holdings of the MMS Funds
unless the disclosure is in accordance
with ADAM’s written procedures,
as approved by its general counsel, or
is required by law or regulation.
“This
settlement includes strong provisions
regarding corporate governance aimed at
ensuring that these defendants comply
with fund policies and treat all investors
in a fair and honest manner,” said
Attorney General Harvey.
“These
defendants are paying a substantial penalty
for playing favorites with a major investor,”
said Securities Chief Widmann. “We
seek through our enforcement efforts to
ensure that all investors get honest information
and a level playing field when they enter
the market. In this case, the defendants
did not afford long-term investors those
fundamental rights.”
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
for New Jersey. Deputy Attorneys General
Victoria Manning and Anna Lascurain handled
the case for the Attorney General.
The
settlement document outlines findings
of fact made by the Attorney General against
ADAM, PAD and PEA.
The
Attorney General found that PEA entered
a market timing arrangement with Brean
Murray, Inc., a New Jersey registered
broker-dealer, on behalf of Canary, under
which Canary was permitted to market time
up to $100 million at any given moment
in certain of the MMS Funds, in exchange
for placing $25 million of long-term “sticky
assets” in a separate fund.
In
a little more than a year, Canary made
more than 200 market timing transactions
totaling more than $4 billion in purchases
and redemptions. Canary was permitted
to make 48 “round trips” per
year in each of the funds involved, in
excess of a restriction of six round trips
per year in the fund’s prospectus
that applied to all of their investors.
PEA arranged for individuals at PAD who
enforced fund policies against market
timing to permit Canary’s market
timing transactions. PEA, through Brean
Murray, also disclosed additional information
to Canary, not disclosed to other investors,
on the specific holdings of the mutual
funds, which put Canary in a unique position
to market time and hedge their investments.
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. Eastern Time 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.
Consent
Order (83k pdf)
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