“The Securities and Exchange Commission accused several units of Pimco Funds, as well as the chairman of the boards of more than two dozen of Pimco’s mutual funds and a former portfolio manager, of defrauding investors by allowing a favored client to engage in trading in stock funds that violated the firm’s own rules and hurt long-term investors,” writes Tom Lauricella in today’s Wall Street Journal.
“The civil-fraud charges, filed in federal court in Manhattan, mark the first time since the fund-trading scandal erupted in September that the SEC has taken action against the chairman of a fund’s board. The charges also included the first against a portfolio manager for playing a role in setting up improper agreements to allow short-term trading.”
“‘ The misconduct started right at the top,’ said Randall Lee, director of the SEC’s Pacific regional office, which is leading the agency’s investigation into Pimco.”
“Critics have long complained that chairmen of fund boards shouldn’t have direct ties to fund-management companies, as is the case at Pimco Funds. The SEC has proposed a rule that would require an independent chairman, and the charges spurred a call from Capitol Hill for the rule’s adoption. ‘Today’s case is a textbook example of why we need independent chairmen at mutual funds,’ said Rep. Michael G. Oxley, a Republican from Ohio, who is chairman of the House Financial Services Committee.”
“The individuals named in the complaint are Stephen Treadway, 56 years old, chairman of the board of Pimco Funds: Multi Manager Series who also serves as head of Pimco’s fund-sales arm; and Kenneth Corba, 51, a former Pimco stock-fund manager and former head of PEA Capital LLC, which oversees a number of Pimco stock funds.”
“In a statement, PEA Capital said it was ‘disappointed’ with the SEC’s actions, contending that ‘the charges, including those against Mr. Treadway, are inappropriate.’ However, the firm said it looked 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.’
“A lawyer for Mr. Corba said his client ‘adamantly denies’ the allegations of wrongdoing. ‘He looks forward to his day in court and is confident he will prevail,’ said Jim Rehnquist, a partner at Goodwin Procter LLP. A lawyer for Mr. Treadway couldn’t be reached.”
“The SEC lawsuit didn’t name Pimco’s well-known bond-fund group, Pacific Investment Management Co. In February, New Jersey regulators made similar allegations against Pimco Funds, but also filed suit against the bond group, which is home to star manager William Gross. The New Jersey case, however, doesn’t include charges against Messrs. Treadway and Corba.”
“At the heart of the SEC’s complaint are allegations that executives at Pimco, a unit of the German insurer Allianz AG — of which PEA Capital is also a unit — allowed a New Jersey hedge fund, Canary Capital Partners LLC, to engage so-called market timing trading of several Pimco Funds. This access was granted in exchange for Canary’s making $27 million worth of long-term investments in other Pimco-run funds, which in turn would provide Pimco with greater management fees, the SEC said in its complaint.”
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