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Rekenthaler Report

PIMCO: Villain or Hero?

At this stage of the investigation, it's anybody's guess.


Bad Service
On Monday, PIMCO disclosed that the SEC had served the company with a "Wells Notice" for alleged infractions in pricing bonds for  PIMCO Total Return Active ETF (BOND), launched in early 2012. A Wells Notice indicates that the SEC plans to file a civil suit against the company, but PIMCO does have the opportunity to attempt to dissuade the commission. The notice "pertains to the valuation of smaller sized positions in non-agency mortgage-backed securities" bought by the fund during its first four months of operations.

That is all we know, on the record. As Wells Notices are private matters, the SEC has no filing to peruse, nor has PIMCO publicly revealed further information. Off the record, though, somebody has been talking, as various articles report that the matter involves the pricing of "odd-lot" securities. Odd lots, meaning small volumes of securities (as opposed to "round lots," which in institutional bond circles often means $1 million), tend to carry lower prices. If BOND had purchased odd lots at their discounted prices, then marked them at prices quoted by pricing services without regard to lot size, it could have generated quick accounting profits to jump-start its new, high-profile exchange-traded fund.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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