Nov. 14–The already hard-hit mutual fund industry endured two new blows yesterday as more top executives resigned and one of the nation’s highest-profile fund families reached a partial settlementwith regulators over improper trading activities.

Gary Pilgrim and Harold Baxter, the founders of Pilgrim Baxter & Associates, stepped down yesterday after an internal review discovered that Pilgrim, 63, had invested in an separate partnership, or hedge fund, to actively trade in the company’s PBHG funds.

Meanwhile, the Securities and Exchange Commission reached a partial settlement with Boston-based Putnam Investment Management on charges that it committed securities fraud by failing to disclose that employees were potentially trading in their own funds at the company.

Putnam agreed to significantly reform its corporate governance and compliance procedures. The company also said it would reimburse shareholders affected by the market timing activities and pay a penalty. Amounts have not been determined, the SEC stated.

In other developments yesterday:

— An internal probe at the Boston-based money management firm Loomis Sayles found two cases of rapid trading in its flagship bond fund.

— Janus Capital Group in Denver reported 12 cases of market timing, more than previously disclosed.

— FleetBoston and Manhattan-based BlackRock, an investment management firm, said they have received subpoenas from regulators examining market timing and late trading within the mutual fund industry.

These developments are the latest in a 10-week probe by state and federal regulators that has revealed improprieties in the $7.1 trillion industry. Many of the investigations center on illegal late trading or market timing, where large investors rapidly buy and sell shares, eroding the value of smaller shareholders’ portfolios.

With regulators and legislators keenly aware that 95 million Americans have entrusted their savings to mutual fund managers, efforts are underway to adopt new rules aimed at safeguarding investors’ money. The widespread scandal has also shocked the industry trade group, which is supporting reforms.

“We’re strongly opposed to the violations of trust that have surfaced,” said John Collins, a spokesman for the Investment Company Institute, the mutual fund lobbying group.

Wayne, Pa.-based Pilgrim said yesterday that Gary Pilgrim was using a partnership to actively trade shares of certain PBHG funds between March 2000 and December 2001, when the company brought it to a halt. Harold Baxter, 57, was aware of the partnership and Gary Pilgrim’s involvement, which did not include a managerial or operational role.

Critics said yesterday the type of trading Gary Pilgrim’s partnership engaged in may have eroded the returns of long-term investors in PBHG funds. New York State Attorney General Eliot Spitzer is considering criminal charges against Pilgrim, sources said.

“Here are two principals of a business who are willing participants in an activity that could be detrimental to the shareholders of the funds they sponsor,” said Geoff Bobroff, a mutual funds consultant in East Greenwich, R.I. “The people in partnerships and hedge funds take advantage of the remaining shareholders because they are traders and not buy-and-holders.”

Besides resigning, Pilgrim will contribute to the PBHG funds all personal profits he earned by using his partnership to trade PBHG shares. The company will reimburse to the funds the management fees it earned from the partnership’s investments. And the fund family will review its internal controls and trading practices, and add measures to prevent market timing to its prospectus.

Unlike many other funds targeted in the mutual fund probe, PBHG Funds’ prospectuses don’t address market timing, experts said. This has led some to wonder whether the fund industry is over-reacting, especially since Pilgrim was a passive investor in the partnership.

“It feels a little like a witch-hunt mentality,” said Charlie O’Neill, a consultant at Dalbar, a Boston-based financial services market research firm. “I don’t exactly see what he did wrong.”

David Bullock, who yesterday replaced Baxter as chief executive, also will take over Pilgrim’s duties as president of both PBHG Funds and PBHG Insurance Series Fund. Michael Sutton, portfolio manager of PBHG Large Cap Growth Fund, and Peter Niedland, who runs PBHG Emerging Growth Fund, will take over Pilgrim’s portfolio management duties on an interim basis.

Yesterday’s announcement added fuel to the argument that portfolio managers should not be allowed to run both mutual funds and hedge funds. The House Financial Services Committee may sponsor legislation that would bar mutual fund portfolio managers from also running hedge funds.

“Another conflict of interest that is simply unacceptable is that of a portfolio manager managing both a mutual fund and a hedge fund,” said Rep. Richard Baker, R-La., said in a hearing on Capitol Hill last week.

Putnam, meanwhile, is the first fund company to face — and now settle — SEC charges. The agency charged that Putnam allowed fund managers Justin Scott and Omid Kamshad to market time their own international funds for personal profit.

The SEC also alleges that Putnam failed to supervise Scott, Kamshad and other employees, to have policies and procedures in place to prevent the misuse of nonpublic information, and to adequately enforce its code of ethics. Attorneys for the fund managers could not be reached for comment yesterday.

As part of the settlement, Putnam will have to create an internal compliance controls committee, maintain a code of ethics oversight committee, and retain an independent compliance consultant. The chief compliance officer will have to report all violations to the board.

Also, at least 75 percent of the fund board of trustees and its chairman must be independent. And, employees who invest in Putnam funds must hold those shares for at least 90 days, and in some cases, up to a year.

The settlement covers many important corporate governance and compliance issues, said Russell Kinnel, Morningstar’s director of fund analysis. The fund research firm recommends not adding new money to Putnam, but is encouraged by the recent resignation of chief executive Lawrence Lesser and appointment of Charles “Ed” Haldeman as his replacement.

Spitzer, however, was not pleased by the settlement. The settlement is “inadequate and a misstep by the SEC. Among critical issues it does not address are fees and the amount of money that Putnam would have to disgorge,” said Juanita Scarlett, Spitzer’s spokeswoman. The attorney general is concerned that individual investors are charged higher annual fees and expenses than institutional investors, such as retirement funds.

The fund family has yet to settle charges brought by Massachusetts regulators. Scott and Kamshad also face SEC charges of securities fraud.

—–

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(c) 2003, Newsday, Melville, N.Y. Distributed by Knight Ridder/Tribune Business News.

MMC, JNS, FBF, BLK,

Nov. 14–The already hard-hit mutual fund industry endured two new blows yesterday as more top executives resigned and one of the nation’s highest-profile fund families reached a partial settlementwith regulators over improper trading activities.

Gary Pilgrim and Harold Baxter, the founders of Pilgrim Baxter & Associates, stepped down yesterday after an internal review discovered that Pilgrim, 63, had invested in an separate partnership, or hedge fund, to actively trade in the company’s PBHG funds.

Meanwhile, the Securities and Exchange Commission reached a partial settlement with Boston-based Putnam Investment Management on charges that it committed securities fraud by failing to disclose that employees were potentially trading in their own funds at the company.

Putnam agreed to significantly reform its corporate governance and compliance procedures. The company also said it would reimburse shareholders affected by the market timing activities and pay a penalty. Amounts have not been determined, the SEC stated.

In other developments yesterday:

— An internal probe at the Boston-based money management firm Loomis Sayles found two cases of rapid trading in its flagship bond fund.

— Janus Capital Group in Denver reported 12 cases of market timing, more than previously disclosed.

— FleetBoston and Manhattan-based BlackRock, an investment management firm, said they have received subpoenas from regulators examining market timing and late trading within the mutual fund industry.

These developments are the latest in a 10-week probe by state and federal regulators that has revealed improprieties in the $7.1 trillion industry. Many of the investigations center on illegal late trading or market timing, where large investors rapidly buy and sell shares, eroding the value of smaller shareholders’ portfolios.

With regulators and legislators keenly aware that 95 million Americans have entrusted their savings to mutual fund managers, efforts are underway to adopt new rules aimed at safeguarding investors’ money. The widespread scandal has also shocked the industry trade group, which is supporting reforms.

“We’re strongly opposed to the violations of trust that have surfaced,” said John Collins, a spokesman for the Investment Company Institute, the mutual fund lobbying group.

Wayne, Pa.-based Pilgrim said yesterday that Gary Pilgrim was using a partnership to actively trade shares of certain PBHG funds between March 2000 and December 2001, when the company brought it to a halt. Harold Baxter, 57, was aware of the partnership and Gary Pilgrim’s involvement, which did not include a managerial or operational role.

Critics said yesterday the type of trading Gary Pilgrim’s partnership engaged in may have eroded the returns of long-term investors in PBHG funds. New York State Attorney General Eliot Spitzer is considering criminal charges against Pilgrim, sources said.

“Here are two principals of a business who are willing participants in an activity that could be detrimental to the shareholders of the funds they sponsor,” said Geoff Bobroff, a mutual funds consultant in East Greenwich, R.I. “The people in partnerships and hedge funds take advantage of the remaining shareholders because they are traders and not buy-and-holders.”

Besides resigning, Pilgrim will contribute to the PBHG funds all personal profits he earned by using his partnership to trade PBHG shares. The company will reimburse to the funds the management fees it earned from the partnership’s investments. And the fund family will review its internal controls and trading practices, and add measures to prevent market timing to its prospectus.

Unlike many other funds targeted in the mutual fund probe, PBHG Funds’ prospectuses don’t address market timing, experts said. This has led some to wonder whether the fund industry is over-reacting, especially since Pilgrim was a passive investor in the partnership.

“It feels a little like a witch-hunt mentality,” said Charlie O’Neill, a consultant at Dalbar, a Boston-based financial services market research firm. “I don’t exactly see what he did wrong.”

David Bullock, who yesterday replaced Baxter as chief executive, also will take over Pilgrim’s duties as president of both PBHG Funds and PBHG Insurance Series Fund. Michael Sutton, portfolio manager of PBHG Large Cap Growth Fund, and Peter Niedland, who runs PBHG Emerging Growth Fund, will take over Pilgrim’s portfolio management duties on an interim basis.

Yesterday’s announcement added fuel to the argument that portfolio managers should not be allowed to run both mutual funds and hedge funds. The House Financial Services Committee may sponsor legislation that would bar mutual fund portfolio managers from also running hedge funds.

“Another conflict of interest that is simply unacceptable is that of a portfolio manager managing both a mutual fund and a hedge fund,” said Rep. Richard Baker, R-La., said in a hearing on Capitol Hill last week.

Putnam, meanwhile, is the first fund company to face — and now settle — SEC charges. The agency charged that Putnam allowed fund managers Justin Scott and Omid Kamshad to market time their own international funds for personal profit.

The SEC also alleges that Putnam failed to supervise Scott, Kamshad and other employees, to have policies and procedures in place to prevent the misuse of nonpublic information, and to adequately enforce its code of ethics. Attorneys for the fund managers could not be reached for comment yesterday.

As part of the settlement, Putnam will have to create an internal compliance controls committee, maintain a code of ethics oversight committee, and retain an independent compliance consultant. The chief compliance officer will have to report all violations to the board.

Also, at least 75 percent of the fund board of trustees and its chairman must be independent. And, employees who invest in Putnam funds must hold those shares for at least 90 days, and in some cases, up to a year.

The settlement covers many important corporate governance and compliance issues, said Russell Kinnel, Morningstar’s director of fund analysis. The fund research firm recommends not adding new money to Putnam, but is encouraged by the recent resignation of chief executive Lawrence Lesser and appointment of Charles “Ed” Haldeman as his replacement.

Spitzer, however, was not pleased by the settlement. The settlement is “inadequate and a misstep by the SEC. Among critical issues it does not address are fees and the amount of money that Putnam would have to disgorge,” said Juanita Scarlett, Spitzer’s spokeswoman. The attorney general is concerned that individual investors are charged higher annual fees and expenses than institutional investors, such as retirement funds.

The fund family has yet to settle charges brought by Massachusetts regulators. Scott and Kamshad also face SEC charges of securities fraud.

—–

To see more of Newsday, or to subscribe to the newspaper, go to http://www.newsday.com

(c) 2003, Newsday, Melville, N.Y. Distributed by Knight Ridder/Tribune Business News.

MMC, JNS, FBF, BLK,