Another U.S. mutual fund firm has been punished by the Securities and Exchange commission for allowing market timing trades in its funds.

The SEC today announced a settlement with Pilgrim Baxter & Associates Ltd. of Wayne, Penn. The SEC’s complaint charged that PBA violated the federal securities laws by, among other things, permitting a select group of investors to trade rapidly in and out of the PBHG Funds, diluting the value of the funds to the detriment of long-term investors.

The settlement involves the dismissal of the district court action as to PBA and the entry of a commission order instituting settled administrative and cease-and-desist proceedings. Based on the findings in that order, the SEC ordered PBA to pay US$90 million — US$40 million in disgorgement and US$50 million in civil penalties. PBA also consented to a censure and an order to cease and desist, and further agreed to undertake a series of compliance and mutual fund governance reforms.

However, the pending district court action will continue against individual defendants Harold Baxter and Gary Pilgrim.

“While we continue to press our case against Harold Baxter and Gary Pilgrim, our settlement with the company they founded represents an important milestone for mutual fund shareholders: We have obtained significant monetary sanctions,” said Stephen Cutler, director of the SEC’s division of enforcement, in a news release.

The SEC’s order found, among other things: from at least June 1998 through December 2001, PBA permitted a select group of investors to trade rapidly in and out of certain PBHG funds. These rapid timers made significant profits over those years, and PBA earned advisory fees on these timers’ funds. Meanwhile, numerous ordinary investors in the PBHG Funds experienced a decline in the value of their investments.

The detrimental timing permitted by PBA was exacerbated by the self-dealing of its principals and founders, Pilgrim and Baxter, the SEC said. PBA permitted a hedge fund in which Pilgrim invested to engage in rapid trading of the PBHG Growth Fund, which Pilgrim himself managed. Moreover, PBA provided 30-day stale PBHG portfolio holdings information to the customers of a New York brokerage firm headed by a personal friend of Baxter. These customers, in turn, used this information to facilitate market timing of the PBHG Funds and to exercise hedging strategies through other financial and brokerage institutions.