Not rolling over

Six months after it all began, harried regulators might soon adopt a "cookie-cutter" approach as they strive to work through a plethora of looming market-timing cases against money managers, David D. Brown, chief investigator for New York Attorney General Eliot Spitzer, said at a recent conference.

The strategy may risk an occasional bout of indigestion, if the case of Pacific Investment Management Co. is any indication. PIMCO, one of the latest cookies on the regulatory plate, is not proving an easy swallow.

Other money management firms in the regulatory spotlight have protested their innocence only to back down and settle. PIMCO is hoping to be found guilty of nothing worse than having affiliated skeletons in its corporate family closet.

Three weeks ago, New Jersey regulators accused the "PIMCO mutual fund family" of a "fraudulent market-timing arrangement" with a notorious hedge fund, Canary Capital Partners LLC, Secaucus, N.J. The giant bond manager and its superstar chief investment officer, William H. Gross, rushed to tell their side of the story, with full-page newspaper advertisements, media interviews and calls to consultants and clients.

The family in question is that of Allianz Dresdner Asset Management of America LP, Newport Beach, Calif., which New Jersey names in its complaint. Also named were three Allianz Dresdner subsidiaries: PIMCO, Newport Beach, Calif.; equity fund arm PEA Capital LLC, New York; and PIMCO Advisors Distributors LLC, Stamford, Conn.

The jump into the breach by the high-profile Mr. Gross marks another chapter in the industry's evolving crisis management story. Whether it has a happy ending will depend on how the facts pan out, and Mr. Gross' intervention certainly raises the stakes for PIMCO should the facts prove unfriendly, said Howard Schneider, the president of Practical Perspectives, Boston, a consultant to the money management industry.

Other industry heavyweights have learned that lesson the hard way.

When regulators began targeting Putnam Investments Inc. last September, Lawrence Lasser, the chief executive who engineered Putnam's explosive growth for two decades, assured clients in a letter that Putnam hadn't lost its fiduciary way. When the facts proved otherwise, Mr. Lasser quickly lost his job.

Such high-level departures are proof that the industry is struggling to acquire a new skill set. After decades without a major scandal, public relations clearly isn't a core competency for most money managers, said Paul Schaeffer, managing director in the San Francisco manager support division of SEI Investments, Oaks, Pa.

Of course, one of the hottest topics for money managers today is the best way to respond to a government lawsuit. According to one school of thought, "the more high profile you are, the more you just anger the regulators," said a consultant who asked not to be named.

Asked about Mr. Gross' public response to his company's mention in the lawsuit, Franklin L. Widmann, chief of the New Jersey Bureau of Securities, declined to comment.

After its initial flurry of publicity, there are signs PIMCO has become more cautious. Mr. Gross wasn't available for this story, nor were other PIMCO officials.

New Jersey's 44-page complaint doesn't focus on the house that Mr. Gross built. Rather, it devotes 18 pages to its case against PEA Capital, followed by five pages for PIMCO Advisors Distributors.

Those companies have appropriated the respected PIMCO name for branding purposes, in the words of Morningstar Inc., Chicago. To PIMCO's chagrin, when New Jersey announced its charges, many plan sponsors and consultants conceded they weren't sure what the group's organizational chart looked like, and what the connections were among the different units.

Only toward the end of the complaint did regulators allege that PIMCO executives reached agreements allowing Canary or its agents to exceed the six "round trips" per year with the PIMCO High Yield Fund and the Real Return Fund that their prospectuses cite as the tripwire for possible intervention by PIMCO.

The six-page section ends by detailing scores of "transactions" by various Canary-related accounts.

In his public response, Mr. Gross said "to the best of our knowledge" PIMCO had never made any arrangements involving "sticky funds," and the Canary trading didn't violate the company's prospectuses.

Consultants and analysts say the PIMCO officials they've talked to explained that the "transaction" figures cited by New Jersey cover a number of legs involved in selling and then buying different funds. There could be up to five to seven "transactions" per round trip, they say. New Jersey's Mr. Widmann said dividing those transaction numbers by two would yield the approximate number of round trips.

Still, in a March 5 letter to "valued clients and friends," PIMCO acknowledged that merely winning legal debating points isn't enough. In light of PIMCO's acceptance of Canary into its fixed-income funds, clients have a right to ask the company "are you as trustworthy as we always thought," wrote Managing Directors William R. Benz, Brent L. Holden and John S. Loftus.

And PIMCO in the letter appeared to be preparing its clients for more regulatory hurdles. The letter said, "we think it is increasingly likely that the SEC, and possibly others, will take further action with regard to PIMCO."

Regulators familiar with the case say New Jersey has some damning material to work with, although the strongest evidence involves the equity side of the group.

For its part, PIMCO hasn't rushed to defend its affiliates, and "family" relations are clearly worse for wear after New Jersey fingered senior executives at PEA Capital and PIMCO Advisors Distributors as parties to the market-timing arrangements. In an interview with the Los Angeles Times, Mr. Gross, a founder of PIMCO as well as the firm's CIO, distanced PIMCO from its East Coast affiliates: "They're a brother-in-law — they're not even a sister," he said.

So far, executives at several public pension funds — including the $167 billion California Public Employees' Retirement System, Sacramento; the $9.8 billion Kansas Public Employees Retirement System, Topeka; the $8.4 billion Hawaii Employees' Retirement System, Honolulu; and the $5 billion New York City Deferred Compensation Plan — have said they are monitoring their ties with PIMCO in light of New Jersey's allegations.

Among consultants and analysts, however, many have been receptive to the arguments put forward by Mr. Gross and his associates. Mr. Gross' letter "did not sound at all like something written by a corporate PR department. It was idiosyncratic, and hence a little more effective," said Monty Tarbox, a consultant with Independent Fiduciary Advisors, Washington.

Mr. Tarbox's colleague, Edward D. Patchett, said, "We're not recommending to any clients at this point in time, based on what we know today, that they take any actions on PIMCO."

Said Timothy R. Barron, director of research at CRA RogersCasey, Darien, Conn.: "It's difficult to make definitive statements, but there doesn't seem to be sufficient reason to change our conclusion" that PIMCO has the leadership and processes in place to deliver superior returns to clients.

Several investment management consultants said that conclusion would hold even if New Jersey is able to prove that PIMCO Advisors Distributors was involved in reaching agreements with Canary that could have sacrificed the interests of mutual fund investors on the equity side.

The story is positive but less clear-cut on the retail side. Eric Jacobson, a senior analyst with Morningstar, said the evidence New Jersey has presented so far against the PIMCO bond operation is murky and open to interpretation.

But the involvement of PIMCO Advisors Distributors, which serves as the market-timing police for those bond funds, is a major concern, and requires strong, quick action, Mr. Jacobson said. If that situation isn't resolved quickly — either Allianz Dresdner answering Mr. Gross' call for a "divorce" of PIMCO from PEA and PIMCO Advisors Distributors, or a major housecleaning at those East Coast affiliates — then Morningstar could be forced to change its view on PIMCO, he said.