Pilgrim Baxter Market Timing Settlement. Pilgrim Baxter Associates Ltd. has agreed to pay $50 million in penalties to settle allegations involving market timing by state Attorney General Eliot Spitzer’s office.
The investment advisory firm will also pay $40 million to injured investors, and reduce management fees by 3.16 percent over five years. The fee reduction is valued at $10 million.
A civil lawsuit against the founders of the firm, Gary L. Pilgrim and Harold J. Baxter, will continue, according to Spitzer’s office.
Pilgrim Baxter, which did not admit fault, issued a statement on Monday saying that an independent consultant would develop a plan to distribute restitution payments to investors. The company said that it had implemented new fees on short-term trades on June 1 as a deterrent.
“These policies were designed and implemented to serve the interests of long-term trading investors by seeking to eliminate opportunities for market-timers to profit from rapid short-term trading of the funds,” according to the statement from David J. Bullock, the president and chief executive officer of Pilgrim Baxter.
The market timing practices occurred at PBHG Funds, the mutual fund for which Pilgrim Baxter was the investment adviser.
With market timing, traders make very short-term trades at a detriment to long-term investors. While the practice is legal, Spitzer’s November 2003 complaint had alleged that its implementation had violated restrictions in the fund’s prospectus.
Gary L. Pilgrim and his wife, and two other partners, established the Appalachian Trails hedge fund, which was allowed to conduct extensive timed trading of PBHG’s funds. Pilgrim and his wife maintained a substantial ownership interest in the hedge fund, which was allowed to trade in and out of funds well in excess of the four times per year that was specified in the company prospectus, according to Spitzer’s office.
Pilgrim Baxter has also agreed to set new standards for the independence of its board members, increase accountability, and hire a senior officer to ensure that fees charged by the fund are reasonable, and not subject to a conflict of interest, according to Spitzer’s office.