Class-Action Suits Pile on Pimco, Parent Allianz AG
By ANDREW SIMONS
Step one: Add one big state fraud lawsuit. Step two: Liberally pour in class-action investor suits.
That’s the recipe facing Newport Beach’s Pacific Investment Management Co. as it tries to distance itself from Secaucus, N.J.-based hedge fund operator Canary Capital Partners LLC.
The key issue: was there a special arrangement allowing Canary Capital to unfairly time trades in Pimco’s Newport Beach-based bond funds or affiliated New York-run stock funds?
Pimco is owned by Germany’s Allianz AG.
The latest to allege impropriety is San Francisco law firm Cotchett, Pitre, Simon & McCarthy LLP, which filed suit earlier this month against Pimco, its parent and affiliates on behalf of investors David and Judith Citron.
Market timing refers to frequent “in and out” trades, which generally are frowned on in the mutual fund industry.
Many mutual funds write in specific penalties for investors who make short-term trades in their funds.
The Cotchett, Pitre suit is the sixth class-action suit against Pimco since mid-February, when New Jersey’s attorney general sued Allianz, PEA Capital LLC, Pimco Advisors Distributors and Pimco, charging they allowed Canary and affiliates to profit from some 40-plus improper trades. Other investors, the suit claims, were hurt by the trading.
Days after the New Jersey attorney general filed suit, William “Bill” Lerach, a partner in the San Diego office of New York-based Milberg Weiss Bershad Hynes & Lerach LLP, filed a class-action lawsuit on behalf of Pimco clients.
Federal regulators told Pimco in February that it could face civil charges for improper market timing in its stock funds. Pimco has agreed to repay $1.6 million to the stock funds for losses associated with some short-term trading.
Pimco bond fund manager Bill Gross (photo) has said trading in the company’s bond funds doesn’t violate its prospectuses. A Pimco spokesman said the company doesn’t comment on pending litigation.
On top of the class-action lawsuits, Pimco is facing reprisals from other parties.
Four public pension funds,totaling $3.8 billion under management at Pimco,are considering whether to drop the fund.
Among them is the California Public Employees’ Retirement System, the largest public pension fund in the country. Other states reconsidering their relationships with Pimco are Illinois, Indiana and Hawaii.
Meanwhile, mutual fund rating group Morningstar Inc. recommended investors hold on to shares of Pimco’s bond funds.
Morningstar did suggest investors consider selling stakes in equity funds owned by Pimco parent Allianz. Those funds are run by PEA Capital.
Pimco had $370 billion invested in its funds at the end of the year, including $74 billion in the country’s biggest bond fund, Pimco Total Return, run by legendary manager Gross, the company’s chief investment officer.
Pimco has denied the allegations against its bond funds.
In a letter signed by Gross and William Thompson, Pimco’s chief executive, and posted on the company’s Web site last month, Pimco denies the allegations presented in the New Jersey suit.
“I know that at the end of every trading day, my focus is not how many new accounts we brought in or even how much my personal portfolio went up, but how many basis points the portfolios managed to outperform the competition. Check our track record,it works,” the letter reads.
“Is Pimco,the bond manager,really down there at the bottom of the barrel? We shout an emphatic ‘No!’ To the best of our knowledge, Pimco has never had any arrangements pertaining to ‘sticky funds,’ late trading/stale pricing arbitrage, or improper dissemination of fund holdings,” the letter said.
