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Under the terms of the settlement, which was reached in cooperation with the Securities and Exchange Commission (SEC), 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, PBA agreed to reduce management fees by 3.16 percent over a five-year period, a reduction valued at $10 million.
The settlement also requires the Wayne, Pa.-based company to provide full cooperation to the Attorney General's office in the on-going litigation against Gary L. Pilgrim and Harold J. Baxter, the former principals of PBA and founders of the PBHG funds.
"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 November, 2003, Spitzer and the SEC filed charges in state and federal court, respectively, against PBA, and Pilgrim and Baxter. Coordinated investigations by the regulators had 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 PBA selectively disclosed the portfolio holdings of certain PBHG funds to facilitate hedge fund market timing strategies in PBHG funds.
The Attorney General's office is continuing to prosecute the case individually against both Pilgrim and Baxter.
As part of the agreement, PBA has also agreed to adopt significant reforms and 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 negotiated at arm's length and are reasonable.
Spitzer thanked the new management of the company for working with his office, and thanked the SEC for its cooperation in jointly investigating and negotiating a settlement with the company.
The settlement was negotiated by Assistant Attorneys General Charles Caliendo, Maria Filipakis, and Verle Johnson under the direction of Investment Protection Bureau Chief David D. Brown, IV, with assistance provided by Economist Hampton Finer of the Attorney General's Public Advocacy Division.
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