Two co-founders of Pilgrim Baxter admitted to market timing and step down. Eliot Spitzer says charges will be filed.
By Associated Press
Published November 14, 2003
The two founders of the mutual fund company Pilgrim Baxter & Associates have resigned because of an inappropriate market-timing arrangement, the company said Thursday, and New York's attorney general said he would pursue charges against the company.
In a letter to shareholders, the company said founder Gary L. Pilgrim, with the knowledge of co-founder and chief executive Harold J. Baxter, had privately invested in a limited partnership that made money in 2000 and 2001 by quickly purchasing and redeeming shares of PBHG Funds, which are managed by Pilgrim Baxter.
That type of trading, known as market-timing, has come under increased scrutiny nationwide. Dozens of fund companies, including Pilgrim Baxter, have been subpoenaed by federal and state regulators this year seeking information about trading practices.
Also Thursday, the Securities and Exchange Commission announced a partial settlement with Putnam Investments under which the company will make significant reforms and establish a process for repaying investors harmed by excessive market-timing. But Massachusetts' top security regulator said his case against Putnam would continue.
And FleetBoston Financial Corp. disclosed Thursday that its subsidiaries have been subpoenaed by Massachusetts and federal regulators.
Both Baxter and Pilgrim have now resigned, the Wayne, Pa., company said. The company said it had no evidence that Pilgrim, who was then also the president of the PBGH Funds, or any other employee gave the partnership inside information, but still it felt the arrangement was inappropriate.
New York Attorney General Eliot Spitzer said his office was investigating Pilgrim and charges eventually would be filed, though he did not say what the charges would be.
"The Pilgrim investigation began back in July. The new leadership is in direct response" to our investigation, Spitzer said. "We have a long way to go and there will be charges."
SEC spokesman John Heine declined to comment Thursday.
Regulators have said companies that prohibited market timing but made exceptions for some clients could be charged with fraud.
PBGH had no policy against market-timing at the time of the trades, although Pilgrim Baxter later adopted one.
Pilgrim Baxter's president, David J. Bullock, said the changes resulted from an internal review begun in September after federal and state regulators began examining procedures at mutual fund companies nationwide.
"That review has brought into focus conduct that was not, in our view, consistent with the highest standards of professional and ethical behavior," Bullock said. "We have brought these matters to the attention of the PGHG Funds Board of Trustees and regulatory authorities."
Messages left at the firm for Pilgrim and Baxter were not returned. A company spokesman said they would not be giving interviews.
Boston-based Putnam neither admitted nor denied the SEC's findings that the company violated federal securities law by failing "to take adequate steps to detect and deter" market timing trades and "breached its fiduciary duty to investors."
"This agreement underscores our commitment to address the issues at Putnam swiftly and thoroughly in the interests of our investors, clients and employees," said Charles "Ed" Haldeman, who was named chief executive last week after the ouster of Lawrence Lasser. "It is another important step toward rebuilding Putnam's reputation for integrity and reliability with investors."
The company had previously promised to make full restitution to investors harmed by improper market timing by Putnam employees or customers.
The SEC said the amount of any civil penalty or monetary relief would be determined later.
But Massachusetts Secretary of State William Galvin, whose office has also filed a civil complaint against Putnam, excoriated the SEC and Stephen Cutler, its head of enforcement.
"It's just convincing evidence of the ineffectiveness of the Securities and Exchange Commission," Galvin said. "They should be more interested in wrongdoing instead of papering it over, which is what this is."
Galvin said the SEC should not have signed a deal until Putnam admitted to wrongdoing, provided a full accounting of alleged misdeeds and was required to pay a fine.
"It clearly demonstrates the SEC is more interested in protecting the fund industry than the investor," Galvin said.
And New York's Spitzer, who has not brought legal action against Putnam, said: "If the SEC thinks this is adequate, then clearly they don't understand the issues."
FleetBoston said in a quarterly financial statement that it had received subpoenas and requests for information from Spitzer's and Galvin's offices and from the SEC and the National Association of Securities Dealers.
Fleet provided few details but said it was cooperating with the investigation and "continuing its own examination of these matters, reviewing policies, processes and personnel, and taking appropriate remedial action when called for."
