Pimco’s parent company accused of fraud

Deepa Bharath

The New Jersey attorney general’s office has accused the parent

corporation of Pimco bonds of defrauding investors by allowing a

large client to engage in improper trades worth more than $4 billion.

The suit alleges that the Newport Beach-based bond operation’s

parent company, Allianz Dresdner Asset Management of America, allowed

hedge fund operator Canary Capital Partners LLC and other affiliates

to participate in more than 200 similar transactions between October

2001 and May 2003.

Canary in turn made large investments in mutual funds that

generated sizable dividends for the defendants, the suit alleges.

The allegations stem from an investigation by the attorney

general’s office spanning several months, said Franklin Widmann,

Chief of the New Jersey Bureau of Securities.

“If someone gains, someone else is losing,” he said. “When one

gets special treatment, it amounts to a breach of trust [by the

defendants] to their other investors who are losing their hard-earned

money.”

Pimco, short for Pacific Investment Management Co., has issued a

statement denying the allegations.

“We disagree completely with the characterizations and conclusions

asserted by New Jersey related to Pimco,” spokesman Mark Porterfield

said in a written statement.

The companies reportedly carried out a controversial type of

trading known as “market timing,” which involves frequent “in and

out” trades of mutual fund shares that exploit market conditions and

inefficiencies in the way mutual funds are priced. These transactions

are not illegal, but are limited by most mutual fund companies

because they tend to skim profits from other investors.

Pimco entered into an undisclosed agreement with Canary, Widmann

said.

“They did not give other investors information to make informed

decisions about their investments,” he said.

On Tuesday, Pimco called its arrangement with Canary “an isolated

incident” and said it will repay $1.6 million to the stock funds

affected by the 18-month trade.

Neither the investigation nor the lawsuit is likely to affect

Pimco’s standing in the local investment community, said Chip Hanlon,

chief operating officer and domestic strategist for Euro Pacific

Capital Inc. in Newport Beach.

“Pimco has had a sterling reputation here,” he said. “Given their

well-deserved reputation for quality advice and a high level of

service, I would tend to believe they are innocent until proven

otherwise.”