Nov. 21–Federal and state regulators yesterday charged former mutual fund stars Gary Pilgrim and Harold Baxter with allowing favored investors to make improper trades in funds managed by the companythey founded.
The pair is the highest-profile defendants yet in a burgeoning fund-industry scandal that has cost more than 40 fund executives their jobs, and left dozens of funds scrambling to comply with subpoenas.
The U.S. Securities and Exchange Commission and the New York State attorney general’s office filed civil suits accusing Pilgrim, Baxter and the asset-management company they created, Pilgrim Baxter & Associates, of permitting a hedge fund and customers of a Manhattan-based brokerage to engage in rapid trading known as market timing. Pilgrim and his wife owned a large interest in the hedge fund, and the broker-dealer was run by a friend of Baxter, according to the regulators. Such trading was forbidden for other investors, the complaints said.
Robert Heim, a former SEC lawyer, said the regulators’ cases are strong. When entities connected to a founder engage in activities “being prohibited to the average everyday investor … it’s a clear conflict of interest,” he said.
An attorney for Pilgrim and Baxter, Stephen J. Rothschild of Skadden, Arps, Slate, Meagher & Flom, didn’t respond to calls asking for comment.
In a statement, David J. Bullock, Pilgrim Baxter’s chief executive, said the company is “committed to cooperating with the SEC and New York attorney general to achieve a resolution to this matter, although we do not agree with all the factual allegations or legal conclusions contained in the complaints.”
New York Attorney General Eliot Spitzer yesterday told the U.S. Senate Banking Committee that the Pilgrim Baxter case, with its mesh of hedge funds and mutual funds, represented a major new development in the investigation of corporate and market corruption.
“The dual interests of hedge funds and mutual funds created different tensions for the directors [Pilgrim and Baxter] and temptations that they were unable to resist,” Spitzer said.
Gary Pilgrim and Harold Baxter were forced to resign Nov. 13 after an internal company review found Pilgrim had invested in the hedge fund that was engaging in market-timing, and that Baxter was aware of the fact. The funds Pilgrim and Baxter managed soared during the late 1990s bull market, but lost heavily when a sharp downturn began in 2000.
In their complaints, the SEC and New York State regulators said that between 1998 and 2001, PBHG prohibited excessive “in and out” trading of its funds. Such trading, aimed at taking advantage of lags in the funds’ pricing, hurts long-term shareholders by driving up costs and diluting profits.
According to regulators, Gary Pilgrim was among the first investors in Appalachian Trails hedge fund, which made nearly 100 exchanges in and out of the PBHG Growth Fund between 2000 and 2001. During that time, Pilgrim garnered “a substantial share” of Appalachian’s “multi-million dollar profits” from the trading, the regulators said.
Regulators also accused Pilgrim and Baxter of allowing customers of a Manhattan-based brokerage, Wall Street Discount Corp., to market time PBHG funds.
The brokerage is run by Alan Lederfeind, described in the New York State complaint as “a close personal friend” of Baxter. Wall Street Discount and Lederfeind, who didn’t respond to requests for comment, weren’t charged in yesterday’s regulatory filings.
Chief economic correspondent James Toedtman contributed to this report.
—–
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.
