STAMFORD, Conn., Sept. 13, 2004 (PRIMEZONE) -- As previously reported, PEA Capital LLC (PEA), together with related companies PA Distributors LLC (PAD) and PA Fund Management LLC (PAFM), were charged this past May by the Securities and Exchange Commission (SEC) in connection with short-term trading by a single hedge fund involving four equity mutual funds that were managed and distributed by the companies. Today, the companies and the SEC confirmed that an agreement has been reached settling this matter.
PIMCO, the Newport Beach-based fixed income company, was examined by the SEC and was not charged. PIMCO is not part of this settlement.
The settlement agreement involved the same facts that formed the basis of the State of New Jersey's action that was settled on June 1, 2004, as well as the SEC action filed in May 2004, in the Southern District of New York.
As described in the SEC order, this matter involved a one-off relationship with a single client, Canary Capital. PEA and PAD voluntarily terminated the relationship with Canary Capital after several months, and more than one year before any regulatory scrutiny was brought to bear on market timing and other activities. As the SEC order describes, PAD was diligent in rooting out hundreds of market timers in the funds. The Canary relationship was a unique exception to this policy.
The Company's investigation, conducted by Ropes & Gray with the assistance of Deloitte & Touche, showed that only one fund experienced any harm, and the amount of harm was less than $1 million. Earlier this year, following the conclusion of the review, PEA immediately reimbursed shareholders of the impacted funds $1.6 million, an amount determined to represent actual damages to shareholders plus certain management fees.
Under the agreement with the SEC, in which the companies neither admitted nor denied any wrongdoing, the companies will pay a penalty of $40 million. An additional disgorgement of $8.4 million (for a total of $10 million) will be distributed to the equity Funds or their shareholders.
In response to this situation, PEA, PAD and PAFM have adopted several significant operating and control enhancements to strengthen the companies' transparency and corporate governance. These include:
-- Instituting strengthened market timing review procedures,
including a daily executive review of trading activity;
-- Imposing redemption fees on A, B, C, D, Institutional and
Administrative Share Class of MMS Funds;
-- Installing measures to protect against the inappropriate release
of portfolio information;
-- Closing all PEA hedge funds;
-- Recommending to the Board of Trustees of the equity MMS Funds
that an independent chairman be installed (the board of the
equity MMS Funds already is composed of 75% independent
trustees);
-- Appointing an ombudsman to ensure "whistleblower" complaints are
handled immediately and that appropriate action is taken;
-- Biennially retaining an independent auditor to review compliance
procedures;
-- Establishing a direct reporting relationship between market
timing monitors and PAD's General Counsel requiring that all
future agreements of any kind or nature between funds and
intermediaries adhere to market timing review efforts, as well
as even stricter procedures to prevent late trading; and
-- Forming a Code of Ethics oversight committee to oversee adherence
to ADAM's Code of Ethics.
PEA said this settlement with the SEC, combined with an agreement reached with the Attorney General of New Jersey in June, brings closure to this matter. The company is confident the cooperative spirit in which this settlement was reached, together with the implementation of strengthened governance throughout the companies, will play a critical role in further demonstrating our commitment to serving the best interests of both customers and shareholders.
Background
In early 2004, PEA, together with PAD and PAFM received notice from the SEC indicating they were the subject of potential administrative proceedings in connection with its broad investigation into market timing activities by various mutual fund groups. Subsequently, both the SEC and the New Jersey Attorney General filed charges.
As part of PEA's investigation into this matter, the company hired independent special counsel Ropes & Gray, a prominent Boston -based law firm, assisted by Deloitte & Touche, to review its practices. The independent review of short-term trading in the PIMCO equity Funds determined that PEA did not have a strategy of soliciting investors whose purpose was short-term trading.
The independent investigation determined that shareholders of three funds (PEA Target, PEA Opportunity and PEA Innovation Funds) had actually benefited from the trading and that returns on the remaining fund (PEA Growth Fund) had been diluted by less than $1 million, which was repaid to the PEA Growth Fund in February.
This figure has been validated by an additional independent review conduced by counsel for the MMS Independent Trustees, and their forensic accountants. PEA and its affiliate, PAD, the distributor of MMS Funds, have agreed with the MMS Trustees to compensate for the dilution and to disgorge to the four funds all fees received on the market timer's assets.
Findings of the review of PEA and PAD by Ropes & Gray include the following:
-- No instances of late trading arrangements were found;
-- No instances of employee market timing were found;
-- PEA did not have a strategy of soliciting investors whose intent
was excessive market timing -- the independent review concluded
the Canary situation was a "one-off" exception, which harmed a
single fund by less than $1 million, and which was voluntarily
terminated by PEA and PAD after several months, and more than
one year before any regulatory scrutiny was brought to bear
on market timing and other activities;
-- Employees were diligent in implementing policies adopted to
prevent inappropriate market timing, and when such behavior was
discovered through procedures already in place for that purpose,
steps were taken proactively and promptly to stop such activity;
-- When market timing with the potential to be inappropriate had
taken place, the review found it was terminated based on its
incompatibility with the companies' core business and fiduciary
responsibility to shareholders; and
-- The review confirmed that staff, who are assigned the
responsibility to examine all trades and look for patterns that
might indicate the occurrence of potentially harmful market
timing practices, is properly empowered and that the process
they use is working. Several hundred accounts have been
terminated as a result of procedures designed specifically to
detect inappropriate market timing that could be deemed
detrimental.
Except for the historical information and discussions contained herein, statements contained in this news release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the performance of financial markets, the investment performance of ADAM's sponsored investment products and separately managed accounts, general economic conditions, future acquisitions, competitive conditions and government regulations, including changes in tax laws. Readers should carefully consider such factors. Further, such forward-looking statements speak only on the date at which such statements are made. ADAM undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.