Nov. 14–The widening inquiry into trading misconduct at mutual funds has snared the two founders of high-profile Pilgrim Baxter & Associates in Wayne, the first local fund executives to betoppled by the scandal.

Harold J. Baxter and Gary L. Pilgrim “accelerated their planned retirements” and left the firm, David J. Bullock, who replaced Baxter as chief executive, said yesterday in a letter to shareholders. Bullock also replaced Pilgrim as president of PBHG Funds, a group of 18 mutual funds with $7.4 billion in assets to which Pilgrim Baxter acts as adviser.

Bullock, who joined Pilgrim Baxter in July as its president, said he began an internal inquiry in September that discovered Pilgrim was a “passive” investor in “a private investment limited partnership, unaffiliated with Pilgrim Baxter, that actively traded certain PBHG Funds … from March 2000 to December 2001.”

During that time, Pilgrim was managing PBHG’s technology-laden flagship Growth Fund, which, according to a source, was the primary fund used by the outside investment group.

The inquiry at Pilgrim Baxter was not a “coincidence,” but was prompted by a subpoena sent to the firm in July by New York Attorney General Eliot Spitzer, a spokesman for Spitzer said. “It clearly happened in the context of an investigation by our office of their trading practices,” Marc Violette said.

Pilgrim Baxter spokesman Tucker Hewes acknowledged Pilgrim Baxter had received subpoenas from both Spitzer and the Securities and Exchange Commission and said the firm “was cooperating fully with both.”

Neither Baxter, 57, nor Pilgrim, 63, could be reached for comment yesterday.

Spitzer’s office was considering charges, Violette added, though he could not immediately say if they would be civil or criminal.

Pilgrim’s outside partnership was a hedge fund — a private vehicle for wealthy investors that usually takes offsetting large risks. The hedge fund used market-timing techniques to trade in shares of PBHG funds. Pilgrim did not actively direct the hedge fund’s investments, Pilgrim Baxter said.

The hedge fund’s trading in PBHG funds occurred during 20 months when the Nasdaq fell from its all-time high of 5048 to 1577.

Harold Baxter was aware of Pilgrim’s affiliation with the hedge fund and its trading in PBHG funds, the company said.

Still, it was not market timing — frequent trading of mutual-fund shares to take advantage of changing prices — but Pilgrim’s alleged conflict of interest that raised questions in Spitzer’s office, a source familiar with the investigation said.

Market timing is improper if a mutual fund explicitly prohibits it in its prospectus and other literature. PBHG did not prohibit market timing, according to documents it submitted to Spitzer, the source said, and the inquiry was “put on the back burner.”

Then, about a month ago, Spitzer’s office resumed its interest in PBHG when it got a tip that “senior management at Pilgrim Baxter was conflicted” because of Gary Pilgrim’s investment in the hedge fund and because managers were “losing sight of their fiduciary responsibility to their investors.”

There was no evidence that the hedge fund’s trading benefited from any inside information, the company said in a news release. It added that Pilgrim would turn over his profit from the hedge fund’s investments in PBHG Funds.

Baxter and Pilgrim’s departures are the latest involving high-level mutual-fund executives caught up in the industry’s trading scandal.

Spitzer has blanketed the mutual-fund industry with subpoenas. In recent weeks, Richard Strong, founder of Strong Capital Management Inc., resigned as chairman of the company’s mutual-funds group, and Lawrence Lasser, was removed as chief executive of Putnam Investments.

Some funds have been accused of permitting improper market timing, others of allowing some investors to trade after-hours, but at earlier prices, which is unlawful.

For part of the ’90s, PBHG was a high-flying family of funds, reporting impressive returns with its strategy of momentum investing in the stocks of fast-growing technology companies.

Boosted by praise in a Money magazine article in 1993, its Growth Fund rapidly grew in assets — from about $5 million to about $200 million by the end of that year.

The fund returned an eye-popping 92.5 percent in 1999, then slumped for the next three years as the Internet bubble burst — down nearly 23 percent in 2000, down nearly 35 percent in 2001, and down 30 percent in 2002. It has gained 28 percent so far this year.

Pilgrim Baxter was sold three years ago to Old Mutual Plc., based in London.

Yesterday’s revelations “raise all kinds of questions about compliance and governance there,” said Burton Greenwald, principal at the mutual-fund consulting firm of B.J. Greenwald Associates, in Philadelphia.

“It just suggests that the senior people there … apparently lost their moral compass or somehow could not distinguish between what was in the best interest of the shareowners and what was in their individual best interests,” Greenwald said.

“It is unfortunate because [Baxter and Pilgrim] are two people who’ve build a significant and substantial organization that for the most part has made a contribution to the fund industry,” he added.

According to Russel Kinnel, director of fund analysis at Morningstar Inc. in Chicago, the alleged conflict of interest at Pilgrim Baxter is yet another strike against a fund family that has struggled in recent years to hold on to its shareholders’ loyalties.

“It will be tough for them to regain people’s trust. Their performance has not been great to begin with,” Kinnel said, especially in their core growth investments.

The PBHG Growth fund’s assets have dwindled to $1.4 billion from a high of $5.9 billion in 1996.

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To see more of The Philadelphia Inquirer, or to subscribe to the newspaper, go to http://www.philly.com

(c) 2003, The Philadelphia Inquirer. Distributed by Knight Ridder/Tribune Business News.

OML,

Nov. 14–The widening inquiry into trading misconduct at mutual funds has snared the two founders of high-profile Pilgrim Baxter & Associates in Wayne, the first local fund executives to betoppled by the scandal.

Harold J. Baxter and Gary L. Pilgrim “accelerated their planned retirements” and left the firm, David J. Bullock, who replaced Baxter as chief executive, said yesterday in a letter to shareholders. Bullock also replaced Pilgrim as president of PBHG Funds, a group of 18 mutual funds with $7.4 billion in assets to which Pilgrim Baxter acts as adviser.

Bullock, who joined Pilgrim Baxter in July as its president, said he began an internal inquiry in September that discovered Pilgrim was a “passive” investor in “a private investment limited partnership, unaffiliated with Pilgrim Baxter, that actively traded certain PBHG Funds … from March 2000 to December 2001.”

During that time, Pilgrim was managing PBHG’s technology-laden flagship Growth Fund, which, according to a source, was the primary fund used by the outside investment group.

The inquiry at Pilgrim Baxter was not a “coincidence,” but was prompted by a subpoena sent to the firm in July by New York Attorney General Eliot Spitzer, a spokesman for Spitzer said. “It clearly happened in the context of an investigation by our office of their trading practices,” Marc Violette said.

Pilgrim Baxter spokesman Tucker Hewes acknowledged Pilgrim Baxter had received subpoenas from both Spitzer and the Securities and Exchange Commission and said the firm “was cooperating fully with both.”

Neither Baxter, 57, nor Pilgrim, 63, could be reached for comment yesterday.

Spitzer’s office was considering charges, Violette added, though he could not immediately say if they would be civil or criminal.

Pilgrim’s outside partnership was a hedge fund — a private vehicle for wealthy investors that usually takes offsetting large risks. The hedge fund used market-timing techniques to trade in shares of PBHG funds. Pilgrim did not actively direct the hedge fund’s investments, Pilgrim Baxter said.

The hedge fund’s trading in PBHG funds occurred during 20 months when the Nasdaq fell from its all-time high of 5048 to 1577.

Harold Baxter was aware of Pilgrim’s affiliation with the hedge fund and its trading in PBHG funds, the company said.

Still, it was not market timing — frequent trading of mutual-fund shares to take advantage of changing prices — but Pilgrim’s alleged conflict of interest that raised questions in Spitzer’s office, a source familiar with the investigation said.

Market timing is improper if a mutual fund explicitly prohibits it in its prospectus and other literature. PBHG did not prohibit market timing, according to documents it submitted to Spitzer, the source said, and the inquiry was “put on the back burner.”

Then, about a month ago, Spitzer’s office resumed its interest in PBHG when it got a tip that “senior management at Pilgrim Baxter was conflicted” because of Gary Pilgrim’s investment in the hedge fund and because managers were “losing sight of their fiduciary responsibility to their investors.”

There was no evidence that the hedge fund’s trading benefited from any inside information, the company said in a news release. It added that Pilgrim would turn over his profit from the hedge fund’s investments in PBHG Funds.

Baxter and Pilgrim’s departures are the latest involving high-level mutual-fund executives caught up in the industry’s trading scandal.

Spitzer has blanketed the mutual-fund industry with subpoenas. In recent weeks, Richard Strong, founder of Strong Capital Management Inc., resigned as chairman of the company’s mutual-funds group, and Lawrence Lasser, was removed as chief executive of Putnam Investments.

Some funds have been accused of permitting improper market timing, others of allowing some investors to trade after-hours, but at earlier prices, which is unlawful.

For part of the ’90s, PBHG was a high-flying family of funds, reporting impressive returns with its strategy of momentum investing in the stocks of fast-growing technology companies.

Boosted by praise in a Money magazine article in 1993, its Growth Fund rapidly grew in assets — from about $5 million to about $200 million by the end of that year.

The fund returned an eye-popping 92.5 percent in 1999, then slumped for the next three years as the Internet bubble burst — down nearly 23 percent in 2000, down nearly 35 percent in 2001, and down 30 percent in 2002. It has gained 28 percent so far this year.

Pilgrim Baxter was sold three years ago to Old Mutual Plc., based in London.

Yesterday’s revelations “raise all kinds of questions about compliance and governance there,” said Burton Greenwald, principal at the mutual-fund consulting firm of B.J. Greenwald Associates, in Philadelphia.

“It just suggests that the senior people there … apparently lost their moral compass or somehow could not distinguish between what was in the best interest of the shareowners and what was in their individual best interests,” Greenwald said.

“It is unfortunate because [Baxter and Pilgrim] are two people who’ve build a significant and substantial organization that for the most part has made a contribution to the fund industry,” he added.

According to Russel Kinnel, director of fund analysis at Morningstar Inc. in Chicago, the alleged conflict of interest at Pilgrim Baxter is yet another strike against a fund family that has struggled in recent years to hold on to its shareholders’ loyalties.

“It will be tough for them to regain people’s trust. Their performance has not been great to begin with,” Kinnel said, especially in their core growth investments.

The PBHG Growth fund’s assets have dwindled to $1.4 billion from a high of $5.9 billion in 1996.

—–

To see more of The Philadelphia Inquirer, or to subscribe to the newspaper, go to http://www.philly.com

(c) 2003, The Philadelphia Inquirer. Distributed by Knight Ridder/Tribune Business News.

OML,