Ex-fund chiefs tied to fraud
PBHG founders permitted improper trading, regulators say
By REED ABELSON AND RIVA ATLAS New York Times
Friday, November 21, 2003
Regulators on Thursday accused Gary L. Pilgrim and Harold J. Baxter, founders of PBHG mutual funds, of fraud. The men allowed two investors to trade billions of dollars in and out of their funds even as they discouraged others from such trading and acknowledged that it caused harm, officials said.
The trading generated millions in profits for those investors and the two founders at the expense of the funds’ shareholders, according to complaints that the Securities and Exchange Commission and New York Attorney General Eliot Spitzer filed.
The outlines of the trading were disclosed when Pilgrim and Baxter stepped down last week. But the complaints contain much more serious accusations about the extent of the activity and its drain on fund shareholders.
The accusations Thursday come on the heels of similar revelations concerning Richard Strong, another prominent fund executive who personally traded in and out of funds managed by his Menomonee Falls firm.
The trading in the Strong and PBHG mutual funds “is the type of behavior we find most egregious,” Spitzer said. “Very senior people are violating their duty to shareholders.”
Accusations that such well-regarded executives saw nothing wrong with profiting at the expense of their investors also disturbed many longtime industry observers.
“I’m just so appalled and so disappointed that people who are so wealthy and in a fiduciary role would allow themselves to nickel and dime people,” said Robert Markman, a money manager who uses mutual funds in his portfolios.
Pilgrim, who became one of the best-known mutual fund managers in the 1990s, invested in a hedge fund that traded rapidly in the PBHG mutual funds from early 2000 through 2001, generating nearly $4 million in profits for him, according to the SEC complaint.
Pilgrim, 63, is the first mutual fund executive to be named in a suit by Spitzer.
Baxter, 57, allowed a brokerage firm run by a close friend to trade in and out of PBHG funds for short-term gain and shared information with that investor about the funds’ portfolios that was not available to the public, according to regulators.
Regulators are seeking at least $250 million in management fees the company received during the rapid trading, as well as millions of dollars of profits from improper trading.
“Gary Pilgrim and Harold Baxter failed to uphold their end of the bargain with the mutual fund investors who entrusted them with their hard-earned savings,” Stephen M. Cutler, the director of enforcement for the SEC, said in a statement.
Attorneys for Pilgrim and Baxter did not return repeated phone calls seeking comment.
Regulators also name Pilgrim Baxter & Associates, the management company the two executives founded, in their complaint. The two resigned last week and are no longer associated with the company or its funds, new chief executive David J. Bullock said in a statement.
In 1982, Pilgrim and Baxter created Pilgrim Baxter, which is based outside Philadelphia and has $7 billion under management.
A former bank analyst, Pilgrim became one of the industry’s most successful money managers, following the style of so-called “momentum investing” that favors aggressive trading of the stocks of the fastest-growing companies. He was able to generate high returns during much of the 1990s, and he and Baxter sold the company to United Asset Management in 1995, retaining their management roles.
Although the rapid trading in and out of the funds, known as “market timing,” had long been tolerated, Pilgrim Baxter began to crack down on the practice in 1998. The company developed a policy to restrict such trading after fund managers complained about the disruption it caused. But the policy was ignored, regulators said, and some market timers were allowed to keep trading.
Two of the favored investors had strong ties to the two fund executives, according to regulators, and were among the main investors benefiting from the practice. Most of the trading occurred within the PBHG Growth fund, PBHG’s largest fund, which Pilgrim managed, regulators say.
Even Pilgrim would say that this trading hurt fund shareholders, according to Spitzer’s complaint. “I think timers are a loser for our shareholders,” he said in an e-mail message.
One of the investors was Appalachian Trails, a hedge fund that Pilgrim, his wife and two other people started in 1995, according to Spitzer’s complaint. Although the hedge fund initially promised not to trade in any of PBHG’s funds, it received permission from Pilgrim and Baxter to market time the group’s own funds in 2000, although the fund directors were never informed, according to the SEC.
The trading was intense. From March 2000 through December 2001, Appalachian made more than 90 exchanges in and out of Pilgrim’s growth fund, which violated the firm’s policies that allowed only four exchanges a year, according to regulators. The total trading volume exceeded $3 billion.
Ordinary investors in Pilgrim’s fund lost money, but Appalachian gained $13 million, with $4 million of that going to Pilgrim, regulators say.
