SEC Charges Pimco in Market-Timing Case

Regulators say the asset manager allowed the Canary Capital hedge fund to trade through its funds.
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Updated from 12:58 p.m. EDT

Federal securities regulators on Thursday filed civil fraud charges against

Pimco

over allegations that the asset-management firm allowed the now infamous

Canary Capital Partners

hedge fund to make up to $4 billion in market-timing trades in several stock funds it manages.

The allegations in the action brought by the

Securities and Exchange

are similar to ones raised in a lawsuit filed in February by New Jersey securities regulators against Pimco, a division of German financial services giant

Allianz AG

(AZ)

The SEC, in the lawsuit filed in New York federal court, specifically charges that Pimco Advisors Fund Management, PEA Capital and Pimco Chairman Stephen Treadway defrauded shareholders through an undisclosed arrangement with Canary to permit the market timing trades. Also charged was Kenneth W. Corba, a former Pimco top executive.

PEA Capital is the advisor on some of Pimco's stock funds.

Not named as defendant in the SEC suit was Pimco Investment Management Co., the firm's better-known bond division, whose public face is fund manager Bill Gross.

The bond fund manager was named in the New Jersey action. A source familiar with the SEC investigation said the agency's lawyers did not find sufficient evidence to implicate the Pimco bond funds in the market-timing arrangement.

A Pimco spokesman could not be reached for a comment. Harvey Wolcoff, an attorney for Pimco and Treadway, also was unavailable for comment.

Market timing is the term for a shady strategy in which mutual fund shares are bought and sold frequently in order to profit from price differences in different markets. It's harmful for the vast majority of mutual fund investors, because it can dilute the value of a fund by driving up trading and administrative costs.

The SEC says the market timing deal with Canary, which involved over 100 trades, wasn't disclosed to investors in the Pimco equity funds. Regulators allege that Canary, in return for the right to market time shares of the equity funds, deposited millions of dollars in so-called sticky assets into a hedge fund managed by Pimco.

Gross, the best-known manager at Pimco, issued his own statement saying he thought the far-reaching investigation of the mutual fund industry was turning into a witch hunt. He said regulators had done a good job in exposing improper trading in the mutual fund industry, but lamented that "a cleansing process can go too far."