The agreement with PBHG founders Gary L. Pilgrim and Harold J. Baxter resolves allegations that the two men secretly facilitated market timing arrangements with favored clients while PBHG prospectuses sharply limited shareholders' abilities to trade in and out of the funds.
Today's agreement was announced jointly with the Securities and Exchange Commission.
"As founders of a company that bore their names, Mr. Pilgrim and Mr. Baxter should have set an example of integrity and fair play," Spitzer said. "Instead, they were at the center of improper conduct that deceived and harmed their clients."
Coordinated investigations by state and federal regulators revealed that the defendants permitted certain hedge funds and others to market time in the PBHG family of mutual funds, in contravention of the express restrictions of the applicable prospectuses. Entities 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. The investigation also revealed that Pilgrim Baxter & Associates (PBA) - - the investment adviser for PBHG funds, now known as Liberty Ridge Capital - - selectively disclosed the portfolio holdings of certain PBHG funds to facilitate hedge fund market timing strategies in PBHG funds.
In June, 2004, Attorney General Spitzer announced a settlement with PBA under which PBA paid $40 million in disgorgement and restitution and a $50 million civil penalty. PBA further agreed to a 5-year reduction of management fees valued at $10 million and significant corrective measures including new requirements for disclosure to investors of expenses and fees, new standards for board independence, greater board and adviser accountability and a commitment to hire a senior officer to ensure that fees charged by the funds are reasonable and are negotiated at arm's length.
Under the terms of this settlement, Pilgrim and Baxter will each pay $60 million in disgorgement and restitution to investors and $20 million each in civil penalties. The total value of the settlement is $160 million. In addition, pursuant to the settlement, both Pilgrim and Baxter are barred from the securities industry for life.
To date, the investigation into the mutual funds industry has resulted in $1.17 billion in restitution to investors, $821 million in civil penalties, and $925 million in anticipated reductions in mutual fund fees over five years. To date the settlements have generated over $2.9 billion in total value.
The litigation was handled by Assistant Attorneys General Charles Caliendo and Maria Filipakis under the direction of Investment Protection Bureau Chief David Brown, IV, with Economist Hampton Finer of the AG's Public Advocacy Division.
Attachments:
