Mutual fund firms may face criminal charges in N.Y. - East Valley Tribune: Business

Mutual fund firms may face criminal charges in N.Y.

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Posted: Friday, November 21, 2003 9:05 am | Updated: 1:08 pm, Thu Oct 6, 2011.

WASHINGTON - The New York attorney general who began the investigation into mutual fund trading abuses said Thursday his office probably would bring criminal charges against some companies in especially egregious cases.

As the industry scandal spread, senators voiced concern at a hearing about several financial firms that are alleged to have repeatedly committed fund trading and marketing violations and to have considered any penalties for such conduct as a cost of doing business.

Eliot Spitzer, the New York state attorney general, was asked how he proposed to deal with the problem.

‘‘It’s fair to presume that there will be criminal cases brought,’’ he told the Senate Banking Committee. That could represent the ‘‘death penalty’’ for those firms, he said.

A criminal conviction against a company could put it out of business, as happened last year to giant accounting firm Arthur Andersen after it was convicted of obstruction of justice for destroying Enron audit documents.

Criminal charges would go beyond the spate of civil actions that Spitzer, other state regulators and the Securities and Exchange Commission have been lodging against big mutual fund and investment firms in recent weeks.

The regulators spoke the same day that Spitzer’s office and the SEC charged Gary Pilgrim and Harold Baxter, founders of Pilgrim Baxter & Associates, which manages the PBHG fund family, with improper trading of their funds to benefit themselves and friends at the expense of longer-term shareholders.

The civil charges mark the first time fund company leadership has been directly charged in a trading scandal that has rapidly spread across the $7 trillion fund industry.

Previously, regulators had taken action against two former Putnam Investments portfolio managers, as well as the firm, but Putnam’s top executives were not directly accused.

Authorities said it appears Gary Pilgrim benefited the most from the trades, while Baxter broke the law by allowing them.

One trading arrangement netted more than $13 million in profits, including $3.9 million for Gary Pilgrim, according to the SEC complaint.

The agencies said they will seek restitution for investors as well as financial penalties.

The New York state complaint also seeks the return of all management fees earned by Pilgrim Baxter during the alleged wrongdoing — which it estimates at $250 million.

‘‘There will be enormous fines,’’ New York State Attorney General Eliot Spitzer told The Associated Press.

‘‘This was such a gross violation of their fiduciary duties.’’

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