Securities and Exchange Commission
settled a market-timing case with Pilgrim Baxter co-founders Harold Baxter and Gary Pilgrim, who agreed to pay out a "virtually unprecedented" $160 million.
Wednesday's settlement calls for Baxter and Pilgrim to each pay $80 million -- $60 million in disgorgement and $20 million in civil penalties -- in return for the dismissal of charges against them. Baxter and Pilgrim were also barred from future employment in the securities industry under the terms of the agreement. The fines stand out in the ongoing mutual fund scandal.
"The amounts being paid in this settlement are virtually unprecedented for individuals in civil cases," said SEC enforcement director Stephen Cutler. "Along with the permanent bars, the monetary sanctions we have obtained here reflect the severity of the misconduct and the fundamental breach of duty at issue in this case."
The deal follows a $100 million settlement Pilgrim Baxter reached in June with New York Attorney General Eliot Spitzer. In that deal, the firm agreed to disgorge $40 million to injured investors and to pay $50 million in civil penalties. The company also agreed to lower management fees by 3.16% over a five-year period, a reduction valued at $10 million.
Last November, Spitzer and the SEC filed charges against the firm and its co-founders, charging that the company permitted certain hedge funds to "market time" in the PBHG funds despite the fact 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, hurting othr investors. 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.
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.