PIMCO Advisors Fund Management LLC, PIMCO Advisors Fund Management LLC, PEA Capital LLC f/k/a/ PIMCO Equity Adviors LLC, PIMCO Advisors Distributors LLC, Stephen J. Treadway, and Kenneth W. Corba
The Securities and Exchange Commission today filed a complaint in United States District Court seeking injunctive and other relief against PIMCO Advisors Fund Management LLC (PAFM), PEA Capital LLC (PEA), PIMCO Advisors Distributors LLC (PAD), Stephen J. Treadway, the chief executive officer of PAFM and PAD as well as the chairman of the board of trustees for the PIMCO Funds: Multi-Manager Series, and Kenneth W. Corba, PEA's former CEO, alleging violations of the antifraud and other provisions of the federal securities laws in defrauding PIMCO mutual fund investors, in connection with an undisclosed market timing arrangement with Canary Capital Partners LLC. According to the complaint, from February 2002 to April 2003, Canary engaged in approximately 108 round-trip exchanges in an aggregate amount of over $4 billion in several PIMCO Funds pursuant to its special market timing arrangement.
PAFM is an investment adviser for the PIMCO Funds: Multi-Manager Series, PEA is the investment sub-adviser for several of the PIMCO Funds, and PAD is a broker-dealer that serves as the distributor for the PIMCO Funds.
The Commission's complaint, filed in United States District Court in Manhattan, alleges as follows.
- "Market timing" refers to the practice of short term buying and selling of mutual fund shares. From February 2002 to April 2003, the PIMCO Funds' advisers provided "timing capacity" in their mutual funds to Canary in return for long-term investments (referred to as "sticky assets") in a mutual fund and a hedge fund from which PAFM and PEA earned management fees. The prospectuses for the mutual funds failed to disclose to investors that an agreement had been made to permit timing in the funds in exchange for sticky assets. In addition, the prospectuses also gave the misleading impression that the PIMCO mutual funds discouraged timing.
- At the height of the agreement, Canary used over $60 million in timing capacity in several different mutual funds and invested $27 million in sticky assets into a mutual fund and a hedge fund. Even as it allowed Canary to engage in this market timing activity, the distributor of the PIMCO Funds, PAD, simultaneously prevented numerous other shareholders from engaging in the same rapid trading as Canary by issuing warning letters, freezing accounts, or blocking trades. For instance, in 2002 PAD froze nearly 400 accounts because of market timing or frequent trading in those accounts. Finally, PEA disclosed nonpublic portfolio holdings to the broker-dealer that executed Canary's trades.
- Stephen J. Treadway, age 56, of New York, N.Y., the CEO of PAFM and PAD as well as the chairman of the board of trustees for the PIMCO Funds: Multi-Manager Series, approved the market timing arrangement in approximately January 2002 but did not disclose his knowledge of the arrangement to the board of trustees until approximately September 2003.
- Kenneth W. Corba, age 51, of Greenwich, Conn., the former CEO of PEA, negotiated and approved the timing and sticky asset arrangement with Canary. He was the portfolio manager for the PIMCO Growth Fund, which provided Canary with $30 million in market timing capacity, and for the PIMCO Select Growth Fund, which received $25 million in sticky assets from Canary.
PAFM, PEA, PAD, Treadway, and Corba are charged with violating, or aiding and abetting violations of, the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. PAFM, PEA, Treadway, and Corba are further charged with violations of Section 34(b) of the Investment Company Act of 1940 for making false and misleading portfolio disclosures. PAFM, PEA, and PAD are also charged with violating Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder for participating in joint transactions raising a conflict of interest. Finally, PAFM and PEA are charged with violations of Section 204A of the Advisers Act for failing to have written policies to prevent the disclosure of nonpublic portfolio holdings to Canary's brokers and others.
The Commission is seeking injunctive relief, disgorgement, monetary penalties, and an order pursuant to Section 36(a) of the Investment Company Act preventing the defendants from serving as investment advisers, principal underwriters, officers, directors, or members of any advisory boards to any registered investment company.
