Fund Times: PIMCO Parent Allianz Charged with Fraud

The New Jersey Attorney General's Office charged PIMCO's parent, Allianz Dresdner Asset Management of America LP (AZ), and three Allianz subsidiaries with defrauding mutual fund investors. According to the complaint, three units of Allianz permitted a major investor to market-time up to $100 million in PIMCO mutual funds in violation of fund policies and to the detriment of ordinary investors.

Who Was Involved?
The three units of the firm named as defendants in the complaint are New York-based PEA Capital (PEA), a shop that runs a small coterie of growth equity funds under the PIMCO PEA brand; Pacific Investment Management Co. (PIMCO), the Newport Beach, Calif.-based bond fund giant; and PIMCO Advisors Distributors (PAD).

According to the complaint, the investor that was allowed to market-time PIMCO funds was Canary Capital Partners--the hedge fund that settled charges with New York Attorney General Eliot Spitzer in September 2003 and started state and federal regulators' widespread investigations into illegal trading activities at mutual fund firms.

What Happened?
Canary Capital was allegedly granted fast-trading privileges for up to $100 million in PIMCO PEA funds ( PIMCO PEA Growth  (PGWCX),  PIMCO PEA Target  , and  PIMCO PEA Opportunity  ) in exchange for a $25 million long-term investment in PIMCO PEA Select Growth. The charges with respect to PIMCO (the shop headed by Bill Gross that runs the well-known bond funds marketed under the PIMCO brand) allege the firm agreed to permit up to 12 round-trip trades per year in  PIMCO High Yield (PHDAX) and  PIMCO Real Return  (PRTNX)--twice the prospectus limit--but it's not entirely clear there was any payment received for the exception. The complaint indicates that Canary money not in High Yield or Real Return would be kept in PIMCO Money Market,  PIMCO Short-Term  (PTSHX), or  PIMCO Low Duration  (PTLDX), but it stops short of characterizing this as a form of payment for the exception, and is vague on the details.

Also, the complaint alleges that between 2000 and 2003, PIMCO Advisors Distributors sent out more than 700 stop notifications and e-mails, identifying nearly 1,700 instances of market-timing that were halted. But individuals charged with policing market-timing were instructed by their superiors to turn a blind eye to Canary's transactions, according to the complaint. Further, the defendants permitted Canary to greatly exceed the limits on round trips through its market-timing transactions.

The complaint alleges that during the period of roughly 1 ½ years in which the defendants permitted Canary to market-time the funds, Canary made more than 200 market-timing transactions, totaling more than $4 billion in purchases and redemptions.

The complaint also says that the defendants provided Canary with nonpublic information on the specific holdings of the mutual funds.

PEA and PIMCO Respond
In a statement Tuesday, PEA said an internal review had revealed that one of the Multi-Manager Series funds that had allowed market-timing had been diluted by less than $1.2 million, a figure that was validated by an independent counsel, PEA said. The other three Multi-Manager Series funds, which are subadvised by PEA, were not harmed by the market-timing activity, the firm said.

PEA has agreed to pay approximately $1.6 million to the funds involved. This amount represents profits that would otherwise have been realized by fund shareholders ($1.2 million) as well as PEA's decision to rebate all fees earned on assets of the short-term trader ($400,000).

PIMCO said in a statement Friday that the trading activities that took place involving Canary and funds managed by Newport Beach-based PIMCO were within the parameters referenced in fund prospectuses, and neither those funds nor their shareholders were harmed by that trading.

Our Take
After speaking with PIMCO, Morningstar is reviewing the situation and will issue a recommendation in the coming days.

Etc.
 Morgan Stanley  announced it closed two funds run by manager Richard Glass to new investors:  Morgan Stanley Institutional U.S. Small Cap Value  and Morgan Stanley Special Value . Existing investors can continue to add to their accounts. Another fund run by Glass, Van Kampen Small Cap Value (VSCAX), will possibly close as well; that fund's board will meet in March to make a decision. Glass also runs Morgan Stanley Small-Mid Special Value , which will remain open.

Mike Hahn is no longer at the helm of  Merrill Lynch Focus Twenty , according to an SEC filing. Hahn has been replaced by a committee headed by Brian Fullerton, who is Merrill Lynch Investment Managers' CIO for the Americas. The committee also comprises Merrill Lynch's head of risk control Anthony Patti, senior risk analyst Linfeng You, and Focus Twenty analyst Steve Salberta. None of the team members have run a mutual fund before. Merrill Lynch would not say why Hahn left the firm. The volatile fund has gained more than 50% in the last 12 months, but its annualized loss of 30% over the last three years is the worst in the large-cap growth category.

Buffalo Funds, which are advised by Kornitzer Capital, have applied to the SEC to launch a new micro-cap fund. If approved, the managers plan to close it after it reaches $250 million in assets. Buffalo's small-cap offering  Buffalo Small Cap (BUFSX), which is closed to new investors, has been topnotch, so this new offering has the potential to be quite popular, said Morningstar fund analyst Gareth Lyons.

TIAA-CREF said that Sachie Makishi and Carlton Martin are no longer managing  TIAA-CREF Growth & Income . Hans Erikson, who is a senior managing director, took their place, according to TIAA-CREF.