U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19888 / October 26, 2006
SEC v. Stephen J. Treadway and Kenneth W. Corba, Civil Action No. 04 CIV. 3464 (VM) (S.D.N.Y.)
Former Chairman of PIMCO Equity Funds Agrees to Settle SEC Fraud Action Following Jury Verdict Against Him for Defrauding Investors in Market Timing Case
The Securities and Exchange Commission today announced that Stephen J. Treadway, the former top executive of the PIMCO equity mutual funds, agreed to a settlement that resolves the SEC's charges against him for defrauding mutual fund investors by approving an undisclosed market timing arrangement. In June 2006, a federal court jury found Treadway liable for committing securities fraud, breaching his fiduciary duty, and other violations of the securities laws. The Commission has filed Treadway's consent to final judgment with the federal district court handling this case.
During the period of his misconduct, Treadway, age 59, of New York, New York, was the CEO of PIMCO Advisors Fund Management LLC, a registered investment adviser; the CEO of PIMCO Advisors Distributors LLC, a registered broker-dealer; and the chairman of the board of trustees of the PIMCO Funds: Multi-Manager Series.
Treadway agreed to pay a total of approximately $572,000 in disgorgement, interest, and civil penalties, and to be permanently enjoined from future violations of the antifraud provisions of the federal securities laws, from breaching his fiduciary duty, from making false statements in mutual fund prospectuses, and from serving as an officer or director of any registered investment company for one year. Treadway also consented to the issuance of an SEC order, based on the entry of the injunction in the federal court action, which bars him from associating with any investment adviser, with the right to reapply after one year.
Randall R. Lee, Regional Director of the SEC's Pacific Regional Office in Los Angeles, said, "The essence of this case is that all investors in a mutual fund -- large or small, wealthy or not -- are entitled to a level playing field. The sanctions against Stephen Treadway, on the heels of the jury's unanimous verdict finding that he betrayed the trust of ordinary investors, are a fitting culmination to our case."
The Commission's complaint, filed in May 2004, alleged that Treadway defrauded investors by approving, but not disclosing, an arrangement that allowed Canary Capital Partners LLC to market time certain of the PIMCO funds. Treadway approved this trading arrangement in approximately January 2002, before Canary's trading started, and despite knowing that the disclosures in the funds' prospectus represented to investors that the funds discouraged and restricted market timing. Treadway did not disclose his knowledge of the Canary market timing deal to the board of trustees until approximately September 2003, when Canary's trading activities were being investigated by government authorities. From February 2002 to April 2003, Canary engaged in over 100 round-trip transactions in an aggregate amount of over $4 billion in several PIMCO mutual funds pursuant to the special market timing arrangement that Treadway approved.
The final judgment against Treadway, which is subject to approval by United States District Judge Victor Marrero, permanently enjoins Treadway from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 10(b) and Rules 10b-5(b) and 10b-5(c) of the Securities Exchange Act of 1934, Section 206(2) of the Investment Advisers Act of 1940, and Section 34(b) of the Investment Company Act of 1940. Treadway is also enjoined from breaching his fiduciary duty within the meaning of Section 36(a) of the Investment Company Act. The judgment further orders Treadway to pay disgorgement of $261,215, prejudgment interest of $49,304, and a civil penalty of $261,215.
Previously, in June 2006, Kenneth W. Corba, the former chief executive officer of PIMCO Equity Advisors LLC, the investment sub-adviser for several of the PIMCO funds, settled the SEC's charges before trial. In September 2004, PIMCO Advisors Fund Management LLC, PIMCO Equity Advisors LLC, and PIMCO Advisors Distributors LLC paid a total of $50 million to settle the Commission's fraud charges arising from Canary's market timing activity.