Mutual Fund Firm and Founders Accused of Fraud
Friday, November 21, 2003
In the go-go 1990s, mutual fund manager Gary L. Pilgrim had one of the hottest hands around.
Buoyed by technology stocks, his PBHG Growth Fund shot up like a rocket, 92 percent in 1999 alone. But the fund sank like a rock when the market turned, posting double-digit drops for three years straight.
Now Pilgrim's investors are being told that their financial guru not only lost their cash, but also betrayed their trust and personally profited at their expense.
New York and federal regulators charged yesterday in a civil fraud complaint that Pilgrim, 63, Harold J. Baxter, 57, and the firm they founded, Pilgrim Baxter & Associates Ltd., secretly allowed predatory short-term trading in funds they oversaw.
Pilgrim and Baxter are the highest-ranking fund executives to be charged in the scandal in the $7 trillion mutual fund industry.
Pilgrim earned nearly $4 million in personal profits in 2000 and 2001 through an investment vehicle called Appalachian Trails LP, a hedge fund that was allowed to violate PBHG's policy and move millions of dollars in and out of the company's equity and cash funds to profit when prices were not up to date, New York state Attorney General Eliot L. Spitzer and the Securities and Exchange Commission alleged yesterday in separate complaints. Ordinary investors were limited to four trades a year, but Appalachian made 110 trades over the two-year period, the filings said.
Baxter, 57, allegedly approved the arrangement with Pilgrim's hedge fund and also shared inside information about the funds' holdings with a friend who owned the Wall Street Discount Corp. brokerage, the complaints said. The broker passed information on to his clients and helped them profit from short-term trades in the PBHG fund, the filings said.
Baxter, who was chief executive of PBHG Funds, and Pilgrim, the president, were forced out Nov. 13.
"Investors deserved better. Their trust was abused," said Merri Jo Gillette, the SEC enforcement official in charge of the investigation.
"There is just no excuse for the sort of behavior we have alleged," SEC chief of enforcement Stephen M. Cutler said in an interview.
Wayne, Pa.-based Pilgrim Baxter is the second fund-management company to be charged with fraud since Spitzer first spotlighted malfeasance in the industry Sept. 3. Putnam Investments was fired by a number of state pension funds and has lost more than $21 billion in assets since it was charged by the SEC and Massachusetts regulators with allowing portfolio managers to make short-term trades from which they profited at the expense of investors.
Pilgrim Baxter's new chief executive, David J. Bullock, said in a prepared statement 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."