Skip to main content

Charges Filed Against Pilgrim Baxter Fund Group, Founders

They face civil fraud charges in connection with an alleged market-timing strategy.

Updated from 12:34 p.m. EST

State and federal regulators filed civil fraud charges Thursday against the founding partners of

Pilgrim Baxter & Associates

over their alleged connection to a market-timing strategy carried out in the firm's own funds.

The firm itself was also charged.

Authorities charged Gary Pilgrim and Harold Baxter a week after they resigned from the 21-year-old mutual fund company. The two men were forced out after it was discovered that Gary Pilgrim, with Baxter's knowledge and approval, was an investor in a small hedge fund that was permitted to actively trade shares of several Pilgrim's funds.

"The top managers of this mutual fund lost their ethical compass and were unable to distinguish between what was in their shareholders' interest and their own interest," said New York Attorney General Eliot Spitzer, whose office has taken a leading role in the fast-expanding mutual fund trading scandal.


Securities and Exchange Commission

also filed civil fraud charges against the two men, along with the fund company they founded, in a separate legal action. Three years ago, the two men sold the company toLondon-based

Old Mutual

, which manages the PBHG family of mutual funds.

TheStreet Recommends

"We agree with the SEC and New York Attorney General's office that the historical conduct that is the subject of the complaints filed today was not consistent with the standard of professional and ethical behavior Pilgrim Baxter expects of all its employees," said David Bullock, the fund company's new chief executive.

The two lawsuits seek restitution for investors in the Pilgrim mutual funds and to bar the two men from serving in any official capacity with an investment fund in the future. Authorities also want to force the defendants to return the estimated $250 million in management fees they earned during the period the improper trading occurred.

Barry P. Barbash, a former SEC attorney and the lawyer for fund company, could not be reached for comment. Also unavailable for comment was Keith D. Krakaur, the attorney for the two individual defendants.

The lawsuits reveal that Gary Pilgrim, who personally raked in $3.9 million from the improper trading in the firm's funds, was an investor in

Appalachian Trails

, a small hedge fund he and his wife had a substantial financial investment in. The hedge fund, managed by Michael G. Christiani, made more than $13 million from its rapid trading in Pilgrim funds in 2000 and 2001.

The actual trading strategy the hedge fund engaged in, market timing, is an arbitrage strategy in which time differences between the closing of U.S. and foreign exchanges are exploited. While market timing is technically legal, most mutual funds say they prohibit it because the rapid in-and-out trading by hedge funds and other investors can dilute the value of a fund's holdings and hurt other investors.

Ironically, none of the prospectuses for the 12 PBHG funds expressly prohibit market-timing, even though the fund company moved to internally crack down on it. Although Pilgrim Baxter's new chief executive, DavidBullock, said he will ask the directors of the PBHG funds to add language to its prospectuses that forbid market-timing.

But it wasn't just Pilgrim's hedge fund that got to engage in market timing. Customers of a small New York brokerage firm,

Wall Street Discount Corp.

, also got an opportunity to market time some Pilgrim funds, according to the complaints. The brokerage is run by Alan Lederfeind, a close friend of Baxter. Spitzer's office alleges that the brokerage got access to "non-public information" about Pilgrim funds.

Lederfeind was unavailable for comment.

In all, the regulators allege that up to two dozen investors were allowed to market time Pilgrim funds. By 2000, the dollar volume of Pilgrim funds being market timed exceeded $500 million.