The two founders of U.S. money-management firm Pilgrim, Baxter & Associates agreed to pay a combined US$160 million in fines and accept lifetime bans from the securities industry to settle charges that they allowed and profited from select investors’ rapid moves in and out of the firm’s PBHG Funds.

The Securities and Exchange Commission and New York attorney general Eliot Spitzer announced the agreement today.

The settlements, with fund company executives, Harold Baxter and Gary Pilgrim, involve the dismissal of a district court action, and the entry of commission orders instituting settled administrative and cease-and-desist proceedings. Based on the findings in those orders, Baxter and Pilgrim must each pay $80 million – $60 million in disgorgement and $20 million in civil penalties. This $160 million will be combined with the $90 million paid by Pilgrim, Baxter & Associates, Ltd. in July 2003 and ultimately will be distributed to injured investors.

Baxter and Pilgrim also consented to orders to cease and desist from committing and/or causing the violations set forth below; to cooperate in ongoing investigations; and to broad restrictions on any future employment in the securities industry, including bars from association with any investment adviser, investment company, or transfer agent. They consented to the orders without admitting or denying their findings.

The orders find, among other things, that:

    from 1998 through mid-2001, PBA, under the leadership of Baxter and Pilgrim, permitted more than two dozen accountholders in PBHG funds to conduct short- term trading, contrary to the funds’ prospectuses; and

  • market timers made significant profits, the firm earned advisory fees on these timers’ funds and Pilgrim and Baxter reaped multi-million dollar profits, whereas numerous other investors in PBHG funds generally experienced a decline in the value of their investments.

    The orders also say that the firm allowed market timing by a hedge fund managed by a friend of Pilgrim, and he invested in the fund. And that, the firm, at Baxter’s direction, provided material, non-public portfolio holding reports of certain PBHG funds to Baxter’s friend, the president of a New York brokerage firm. The brokerage executive in turn provided this information to his firm’s customers, who used the information to market time the PBHG Funds and to exercise hedging strategies through other financial and brokerage institutions.

    “As founders of a company that bore their names, Mr. Pilgrim and Mr. Baxter should have set an example of integrity and fair play,” Spitzer said. “Instead, they were at the center of improper conduct that deceived and harmed their clients.”

    “The amounts being paid in this settlement are virtually unprecedented for individuals in civil cases. Along with the permanent bars, the monetary sanctions we have obtained here reflect the severity of the misconduct and the fundamental breach of duty at issue in this case,” added Stephen Cutler, director of the SEC’s Division of Enforcement.