Gregg Greenberg
New York State Attorney General Eliot Spitzer Monday announced a $100 million settlement with Pilgrim Baxter & Associates, a U.S. mutual fund unit of British insurer Old Mutual Plc, to resolve part of a lawsuit concerning market timing transactions in the PBHG family of mutual funds.
Under the terms of the settlement, which was reached in cooperation with the Securities and Exchange Commission, PBA has agreed to disgorge $40 million to injured investors and pay $50 million in civil penalties. In a separate agreement with Spitzer's office, the company has agreed to lower management fees by 3.16% over a five-year period, a reduction valued at $10 million. "PBA has agreed to a fair settlement and promised continuing cooperation in the investigation of misconduct by its founders," Spitzer said. "This agreement helps investors who were harmed by improper conduct, and allows the company to begin the process of restoring its integrity." In a letter to shareholders, David Bullock, president and CEO of PBA, said the company had "reached an important milestone" and that the agreements would bring "long-term benefits to shareholders of the PBHG funds." He also said that the costs of the settlements would be borne by PBA and not by the PBHG Funds or fund shareholders. In November, 2003, Spitzer and the SEC filed charges in state and federal court, respectively, against PBA, as well as the company's co-founders. The charges were a result of investigations revealing that the company permitted certain hedge funds to "market time" in the PBHG funds despite the fact that that market-timing was listed as restricted in their prospectuses. Market-timing of mutual fund shares is technically a legal trading strategy. But it is prohibited under most mutual fund prospectuses because it can dilute the value of a portfolio's holdings. Since the fund industry scandal erupted last year, more than a dozen mutual fund firms have paid over $2 billion in fines and restitution in the trading scandal. The Attorney General's office is continuing to prosecute the case individually against both Gary L. Pilgrim and Harold J. Baxter, the former principals of PBA and founders of the PBHG funds. According to the charges, one of the hedge funds permitted to time the PBHG funds included a hedge fund in which Pilgrim had a substantial interest, and clients of a New York-based brokerage firm owned by a close friend of Baxter.
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