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Post date: November 20 2003

Pbhg Founders, Firm Named In Fund Timing Suit

New York Attorney General Spitzer today announced civil charges against two founders of a prominent mutual fund family, alleging that the pair facilitated illegal trading of their funds to benefit favored investors at the expense of typical shareholders.

The action against the founders of the Pilgrim-Baxter funds and their investment advisory firm marks the first time in the widening mutual fund industry investigation that top fund managers have been charged in connection with illegal trading practices.

Today’s action is being undertaken in cooperation with the Securities and Exchange Commission.

"The top managers of this mutual fund lost their ethical compass and were unable to distinguish between what was in their shareholders’ interest and their own interest," Spitzer said.

Spitzer’s complaint alleges that between 1998 and 2001, PBHG founders Gary L. Pilgrim and Harold J. Baxter facilitated market timing of mutual fund shares by favored investors, including a hedge fund and a broker/dealer to which they had direct or indirect connections.

The complaint alleges that Pilgrim, his wife and two other partners established the Appalachian Trails hedge fund, which was permitted to conduct extensive timed trading of PBHG’s funds. Pilgrim and his wife maintained a substantial ownership interest in this hedge fund as it engaged in extensive timed trading of PBHG funds. This was in violation of PBHG prospectus’ limitations on short-term trading.

The complaint also alleges that the defendants facilitated timed trading of PBHG funds by clients of a broker/dealer, Wall Street Discount Corp., which was run a close friend of Baxter. The defendants provided Wall Street Discount with non-public information about the portfolio holdings of PBHG funds. This information allowed Wall Street Discount customers to conduct additional market timing of PBHG funds, and generated significant profits for these customers.

The arrangements that were engineered or permitted by Pilgrim and Baxter came at a time when portfolio managers were complaining that market timing was having a negative impact on returns for typical shareholders. PBHG officials estimated that market timers held $466 million in assets in the flagship PBHG Growth Fund in late 2001. This accounted for more 14 percent of the fund.

PBHG moved to restrict market timing of funds -- instituting a policy whereby shareholders were allowed only four trades of a mutual fund annually. But Pilgrim and Baxter arranged for favored clients to be exempted from these restrictions.

Pilgrim, Baxter and the PBHG investment advisor are charged with violations of New York’s Martin Act, General Business Law and Executive Law. The suit seeks restitution for investors, disgorgement of management fees and unspecified fines.

In a related action, the SEC announced the filing of a civil action against Pilgrim, Baxter and their affiliated companies.

The matter is being handled in the Attorney General’s office by assistant attorneys general Charles Caliendo, Maria Filipakis, Verle Johnson under the direction of Investor Protection Bureau Chief David D. Brown, IV.


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