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U.S. Securities and Exchange Commission


LITIGATION RELEASE NO.18474 / November 20, 2003


Securities and Exchange Commission v. Gary L. Pilgrim, Harold J. Baxter and Pilgrim Baxter & Associates, Ltd. (United States District Court, E.D. Pa., Civil Action No. 03-CV-6341)

The Securities and Exchange Commission announced that on November 20, 2003 it filed a civil injunctive action in the United States District Court for the Eastern District of Pennsylvania against Gary L. Pilgrim, of Malvern, PA, Harold J. Baxter, of Berwyn, PA and Pilgrim Baxter & Associates, Ltd. (Pilgrim Baxter), a registered investment adviser headquartered in Wayne, PA, charging them with fraud and breach of fiduciary duty in connection with market timing of the PBHG Funds. Pilgrim was the President, Chief Investment Office and Director of Pilgrim Baxter & Associates, and the President of the PBHG Funds. Baxter was the CEO and Chairman of Pilgrim Baxter & Associates, and the Chairman and trustee of the PBHG Funds and the PBHG Insurance Series Fund. Both Pilgrim and Baxter resigned from each of these positions on November 13, 2003.

The Commission's action is being brought contemporaneously with an action in New York State Supreme Court by the New York Attorney General, with whom the Commission has coordinated its efforts in this matter.

The Commission's complaint alleges that Pilgrim had a substantial interest in a hedge fund, Appalachian Trails, whose trading strategy involved rapid trading of mutual fund shares. In March 2000, with the approval of both Pilgrim and Baxter, Appalachian began market timing several PBHG funds including the PBHG Growth Fund, whose portfolio was managed by Pilgrim. Neither Pilgrim nor Baxter disclosed to the Board of Pilgrim Baxter & Associates, the Board of Trustees of the funds, or fund shareholders, that Pilgrim had an extensive financial interest in Appalachian and that Appalachian had been permitted to implement its trading strategy in PBHG funds. The complaint alleges that over the next 20 months, Appalachian engaged in approximately 120 short-term exchange transactions from PBHG mutual funds into its cash management fund, far in excess of the limit of four such exchanges per year set forth in PBHG's prospectuses. In 2000 and 2001, Appalachian profited by more than $13 million from its trading, $3.9 million of which was Pilgrim's share.

In addition, the Commission alleges that Baxter provided non-public PBHG Fund portfolio information to a close friend in the brokerage business, who was president of Wall Street Discount Corporation, a registered broker-dealer. The friend then passed this information to Wall Street Discount customers who used the portfolio information to market time the PBHG funds and to exercise hedging strategies through other financial and brokerage institutions.

According to the Commission's complaint, the impact of excessive short-term trading on a portfolio manager's ability to effectively manage the assets of the funds was known within the organization, as was the fact that the four exchange limitation was in the best interests of shareholders. Nevertheless, Pilgrim Baxter & Associates permitted numerous PBHG Fund investors to engage in short-term trading without enforcement of the four exchange limitation. "Market-timing" assets in the PBHG funds peaked at approximately $600 million. In July 2001, Pilgrim Baxter & Associates and the PBHG Funds involuntarily redeemed the shares of all identified market timers except for Appalachian and Wall Street Discount, who were permitted to continue their trading through the end of 2001.

The complaint charges that Pilgrim, Baxter and Pilgrim Baxter & Associates violated Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act). The complaint also charges Pilgrim Baxter & Associates with violating Section 204A of the Advisers Act, and Baxter with aiding and abetting those violations. The complaint seeks permanent injunctive relief, disgorgement, prejudgment interest and civil penalties, and also seeks that Pilgrim and Baxter be permanently enjoined from acting in certain enumerated positions with an investment company pursuant to Section 36(a) of the Investment Company Act of 1940.

SEC Complaint in this matter



Modified: 11/20/2003