Investors in the PBHG case receive $125M distribution

BOSTON — Nearly three and a half years after PBHG Funds’ founders were charged with fraud, checks have started going out to mutual fund investors wronged by the alleged trading abuses at their former firm.
Eric Snyder is one of more than 384,000 PBHG Funds investors who will share in the roughly $267 million from a fair fund resulting from Securities and Exchange Commission actions. Checks totaling $125 million were sent out last Monday to 254,000 of those investors.
Two more distributions are slated to occur before Sept. 30.
The money is being distributed to investors harmed by fraudulent market timing involving PBHG Funds between June 1998 and December 2001.
The fair fund resulted from SEC enforcement actions charging unlawful market timing in the funds by Pilgrim Baxter & Associates Ltd. and Gary L. Pilgrim and Harold J. Baxter.
“It would be interesting to know where Gary is now, probably on some island,” said Mr. Snyder, an engineer who lives with his wife and two children in a small town near Syracuse, N.Y.
Mr. Snyder called an 800 number last week and was told that he stands to get $553.64 from the fair fund.
“It’s good,” he said. “I didn’t expect to get rich off it or anything.”
The median payment from the fair fund in the first distribution was $127.82, said Kenneth Lehn, the independent distribution consultant hired in 2004 by Mr. Pilgrim, Mr. Baxter and the firm, which since has been renamed Liberty Ridge Capital Inc. and relocated to Berwyn, Pa., from Wayne, Pa.
Some checks totaled thousands of dollars, said Mr. Lehn, a professor at the University of Pittsburgh’s Joseph M. Katz Graduate School of Business. He declined to be more specific.
‘Long process’
The $125 million that was distributed to PBHG fund investors is among the first — if not the first — instance where fair-fund money in a market-timing case is being distributed directly to fund shareholders, Amy Greer, regional trial counsel, and Catherine Pappas, senior trial counsel, in the SEC’s Philadelphia regional office said last week.
“This has been a very long process,” Ms. Pappas said, adding that it involved many people outside the SEC, such as Mr. Lehn and Boston Financial Data Services Inc. of North Quincy, Mass., the fund administrator.
“We’re glad we’re coming to the end, and we’re getting relief to investors,” she said.
In November 2003, the SEC charged Mr. Pilgrim, Mr. Baxter and Pilgrim Baxter & Associates with fraud in connection with market timing involving PBHG Funds.
The SEC alleged that the defendants allowed a hedge fund in which Mr. Pilgrim and his wife had a n interest — Appalachian Trails LP of Avon, Conn. — to engage in market timing, or rapid trading, of the PBHG Growth Fund, which he managed.
The complaint also alleged that Mr. Baxter provided non-public PBHG fund portfolio information to a friend who was president of Wall Street Discount Corp. of New York, a registered broker-dealer.
The friend allegedly passed on the information to Wall Street Discount customers, who used it to market time PBHG funds.
The complaint said that the defendants understood how excessive short-term trading could affect a portfolio manager’s ability to run a fund and set published limits to curtail such trading. Despite that, however, Appalachian Trails and Wall Street Discount, along with more than two dozen others, allegedly engaged in extensive exchanges with the defendant’s knowledge, the SEC said.
Pilgrim’s profit
From March 2000 to December 2001, the hedge fund’s short-term trading strategy in the PBHG Funds generated a profit of about $9.9 million. Mr. Pilgrim’s share was between $3.7 million and $4 million, the SEC said.
In November 2004, Mr. Pilgrim and Mr. Baxter, who already had resigned their positions at the firm, agreed to pay a total of $160 million to settle the fraud charges.
The settlements involving Mr. Pilgrim and Mr. Baxter resolved both the SEC’s fraud action and an action brought by Eliot L. Spitzer, then New York attorney general.
The settlements were in addition to the $90 million Pilgrim Baxter & Associates settled for earlier. With interest, that $250 million has since grown to $267 million.
Mr. Pilgrim and Mr. Baxter consented to the orders without admitting or denying guilt.
“He should have spent some time with Martha [Stewart],” Mr. Snyder said of Mr. Pilgrim.
The engineer invested a total of about $10,000 in three PBHG funds, including PBHG Growth Fund, during the mid-1990s.
That grew to about $40,000 during the technology boom, and Mr. Snyder, 37, considered using it for a down payment on a vacation home.
The investment in those three funds now totals about $15,000. Maybe he will use the $553.64 to help pay for the Myrtle Beach vacation he and his family took a few weeks ago.
“The vacation cottage will have to wait a few years,” Mr. Snyder said.