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State Sues Mutual Fund Group, Charging Fraud

Feb 17, 2004 | AP The state attorney general's office filed suit Tuesday against the parent corporation of one of the nation's largest mutual fund families, charging it defrauded investors by allowing a major client to unfairly time trades of up to $100 million at a time.

The procedure gave the client an advantage not available to ordinary investors, prosecutors say.

The lawsuit, filed in Superior Court in Essex County, alleges the client made more than 200 market timing trades worth more than $4 billion over an 18-month period from late 2001 through May 2003.

Attorney General Peter Harvey said the suit charges that Allianz Dresdner Asset Management of America LP, the parent of the PIMCO mutual fund group, and three affiliated fund companies entered into market timing agreements with Canary Capital Partners LLC, Canary Investment Management LLC and related entities, each based in Secaucus, in exchange for large investments in funds that generated substantial fees and other income for the defendants.

The suit alleges numerous violations of the New Jersey Uniform Securities Law, and seeks the return of illegal profits, restitution for investors, and civil fines.

Other defendants include PEA Capital LLC (which until last week was known as Pimco Equity Advisors LLC); Pacific Investment Management Co. LLC, and Pimco Advisors Distributors LLC.

An Allianz spokeswoman at the company's London office did not respond to telephone and e-mail messages seeking comment Monday and Tuesday. A spokeswoman for Canary Capital Partners did not immediately return a call seeking comment Tuesday.

Market timing involves frequent "in and out" trades of mutual fund shares to exploit market conditions and inefficiencies in the way mutual funds are priced. Fund shares are priced once a day at 4 p.m EST based on the closing prices of the securities in the fund's portfolio.

Market timers can take advantage of good news affecting foreign stocks that is announced after foreign stock exchanges close. At that point, the stocks in question, and the mutual funds that hold them, are fixed at artificially low prices. The market timer can then buy shares of an underpriced mutual fund, and turn a quick profit after prices respond to the news the next day.

Market timing dilutes the value of a fund by allowing the timer to siphon short-term profits from a long-term investment vehicle.

The mutual funds involved in the lawsuit had policies banning market timing trades.

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