Pilgrim Baxter mutual fund family founders charged

NEW YORK -- The founders of the Pilgrim Baxter mutual fund family were charged by state and federal regulators Thursday with improper trading of their funds to benefit themselves and friends at the expense of longer-term shareholders.

The civil action by the Securities and Exchange Commission and the New York attorney general's office against Gary L. Pilgrim and Harold J. Baxter of Pilgrim Baxter & Associates comes a week after both men were forced out of the company they had built.

It also marks the first time in the current round of mutual fund investigations that fund company leaders have been directly charged in connection with illegal trading practices. Regulators earlier took action against Putnam Investments and two former portfolio managers, but Putnam's executives were not directly accused.

According to the complaint against Pilgrim and Baxter, the trading arrangements netted more than $13 million, including $3.9 million for Gary Pilgrim alone.

"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," New York Attorney General Eliot Spitzer said Thursday.

The two men and their company are charged with fraud and breaching their fiduciary duty to investors. Authorities said they will seek restitution for investors, but did not specify what fines or penalties would be sought.

A call to a Pilgrim Baxter & Associates spokesman seeking comment was not immediately returned.

Last week, the company said Pilgrim had agreed to turn over personal profits he received from the improper trading. The company also said it would reimburse the fund all management fees it had earned on the partnership's trades.

According to papers filed Thursday, Pilgrim, his wife and two other partners established the Appalachian Trails hedge fund, which conducted extensive in-and-out trading of PBHGs funds -- in violation of PBHG rules.

The practice, known as market timing, is not illegal but is widely prohibited because it skims profits from longer-term shareholders. Regulators have said that allowing it, despite policies against it, constitutes fraud.

The SEC is now conducting a broad review of the entire $7 trillion mutual fund business. And Congress is considering legislation that would impose penalties for mutual fund trading abuses, make directors on company boards more independent from fund managers and require companies to disclose more information to investors about fees and fund operations.

Dozens of fund companies have been subpoenaed by the SEC, the states of Massachusetts and New York and other regulators amid reports of widespread improper trading.

Putnam and Canary Capital, a hedge fund operator, have agreed to settlements.

Authorities have also accused some individuals at Fred Alger & Co., Bank of America and Millennium Partners of improper trading. They also have indicated charges are likely against Alliance Capital, as well as Richard S. Strong, the founder of the Strong mutual fund company, who has acknowledged making short-term trades to benefit himself and his family.

Spitzer also announced allegations Thursday that clients of Wall Street Discount, a brokerage run by a friend of Baxter, were provided with information about PBHG fund portfolios not available to the public.

Pilgrim Baxter is owned by London-based Old Mutual PLC. As of Sept. 30, Pilgrim Baxter managed a total of $7.4 billion.