Pilgrim Baxter and Associates Funds Agrees to Settlement In Shareholder Class Action

June 2010 - If you held, purchased or otherwise acquired shares in any of the PBHG Funds during the period from July 30, 1999 to November 13, 2003, inclusive (the “Class Period”), you are a member of the Settlement Class.1 Your rights will be affected by the proposed Settlements and you may be entitled to a payment from the settlement proceeds.

There are six proposed Settlements of claims in the pending class action lawsuit. The Settling Defendants are: (i) Pilgrim Baxter & Associates, Ltd. (“Pilgrim Baxter”); PBHG Fund Distributors; PBHG Fund Services; PBHG Shareholder Services, Inc.; Old Mutual plc; Old Mutual Asset Management; Old Mutual (US) Holdings, Inc.; Gary L. Pilgrim and Harold J. Baxter (collectively, the “PB Advisor Defendants”); (ii) the mutual funds that were series of PBHG Funds Inc. and/or their successors as of July 31, 2009; John R. Bartholdson; Jettie M. Edwards; and Albert A. Miller (collectively, the “PB Funds Defendants”); (iii) AT, L.P. (a/k/a Appalachian Trails, L.P.); CPTR, LLC; and Michael G. Christiani (collectively, the “Appalachian Trails Defendants”); (iv) Banc of America Securities LLC; (v) Bear, Stearns & Co. Inc. (n/k/a J.P. Morgan Securities Inc.), Bear, Stearns Securities Corp. (n/k/a J.P. Morgan Clearing Corp.), and The Bear Stearns Companies Inc. (n/k/a The Bear Stearns Companies LLC) (collectively, the “Bear Stearns Defendants”); and (vi) Canary Capital Partners, LLC, Canary Capital Partners, Ltd.; Canary Investment Management, LLC, and Edward Stern (collectively, the “Canary Defendants”). The proposed Settlements will resolve all claims in the action against the Settling Defendants as well as other Released Parties.

The proposed Settlements collectively provide for payment of $31,538,600 in cash (the “Settlement Fund”), plus interest earned on the Settlement Fund (the “Gross Settlement Fund), comprised of (i) $26,500,000 paid on behalf of the PB Advisor Defendants (as defined below), (ii) $500,000 paid on behalf of the Appalachian Trails Defendants (as defined below), (iii) $441,600 paid on behalf of Banc of America Securities LLC and related entities, (iv) $1,232,000 paid on behalf of the Bear Stearns Defendants (as defined below), and (v) $2,865,000 paid on behalf of the Canary Defendants (as defined below). In addition to these amounts, Class Counsel intends to distribute $5,730,000 plus interest, which was obtained by the Office of the New York Attorney General (“OAG”) in its settlement with the Canary Defendants, to the Settlement Class.

According to the latest docket dated November 5, 2007, discovery has been proceeding in the multi-district mutual funds litigation. Simultaneously, some of the defendants have been involved in settlement discussions with the plaintiffs. This settlement process has been impacted by parallel regulatory proceedings occurring at the Securities and Exchange Commission (“SEC”). Nevertheless, the court has been advised that several settlements have been agreed upon in principle. Additionally, numerous individuals and firms have been voluntarily dismissed by plaintiffs throughout 2005 and 2006. On June 11, 2007, the over-seeing judges issued a scheduling order calling for completion of discovery by March 28, 2008.
Additionally, oral arguments concerning numerous pending motions for dismissal were held on October 5, 2007. Those motions were ordered denied on October 19, 2007.
Numerous motions to dismiss various complaints were filed on February 25 and March 7, 2005.
In April 2004, the case was transferred from the U.S.D.C. for the Eastern District of Pennsylvania to the U.S.D.C. for the District of Maryland. The case is being handled in Multidistrict Litigation, In Re Mutual Funds Investment Litigation, case number 04-MD-15862. On September 30, 2004, a Consolidated Amended Class Action Complaint was filed.
According to a press release dated November 14, 2003, the complaint charges defendants with violations of the Securities Act of 1933 (the ‘Securities Act’), the Securities Exchange Act of 1934 (the ‘Exchange Act’), the Investment Company Act of 1940 (the ‘Investment Company Act’), and for common law breach of fiduciary duties.
The Complaint alleges that during the Class Period the PBHG Mutual Funds and the other defendants engaged in illegal and improper trading practices, in concert with certain institutional traders, which caused financial injury to the shareholders of the PBHG Mutual Funds. According to the Complaint, the Defendants surreptitiously permitted certain favored investors, including defendant Pilgrim’s private investment limited partnership, to illegally engage in ‘timing’ of the PBHG Mutual Funds whereby these favored investors were permitted to conduct short-term, ‘in and out’ trading of mutual fund shares, despite explicit restrictions on such activity in the PBHG Mutual Funds’ prospectuses.
The Ohio Plan is seeking to recover funds lost because of “the company’s breach of its fiduciary duties.” According to a January 23, 2004 press release from former Ohio Attorney General Jim Petro, “[t]housands of Ohio’s public servants trusted Pilgrim Baxter with their retirement dollars and the company responded by letting short-term investors reap unjust windfalls. …Not only did the company lie about monitoring clients who take advantage of short-term price changes, the founders of Pilgrim Baxter also participated in market timing to enrich themselves.”
SUMMARY OF ALLEGATIONS:
The complaint in this litigation alleges that Pilgrim Baxter and certain of its senior executives were aware of, engaged in and facilitated “timing” trades in the PBHG Funds: a money-making act involving short-term trading in and out of a mutual fund. The technique is designed to exploit inefficiencies in the way mutual fund companies price their shares, by allowing certain customers to trade shares at distorted prices that no longer reflect the true value of the fund. As a result, those few customers permitted to engage in market timing typically reap huge profits, the cost of which are borne primarily by the long-term investors in the relevant fund. Pilgrim Baxter & Associates, Ltd., Gary Pilgrim and Harold Baxter have all agreed to the entry of cease and desist orders by the SEC resulting from the market timing activity.
As alleged in detail in the complaint, the Defendants knew, or recklessly disregarded the fact, that trades were being timed and that these timed trades negatively and materially impacted the PBHG Funds, thereby causing significant losses to investors in the PBHG Funds. On November 20, 2003, the Securities and Exchange Commission (”SEC”) and the Office of the New York Attorney General filed complaints against PBHG, Gary Pilgrim and Harold Baxter, the founders and most senior officers advising PBHG mutual funds, alleging that they permitted certain investors to trade billions of dollars in and out of the PBHG Funds and also engaged in and facilitated market timing for their own personal profit. The SEC and New York State investigations uncovered that, from as early as 1998, dozens of select investors in the PBHG funds were permitted to market time. The Defendants themselves estimate that this illegal activity involved at least $573 million by 2001.
By way of example, illegal trading was permitted in the PBHG Growth Fund which was managed by Gary Pilgrim himself. An internal PBHG document entitled “Timer Activity Summary” reveals that as of April 20, 2001, investments by entities engaged in market timing activities reached in excess of $385 million in the Growth Fund alone. During this time, market timers also controlled $91 million, or 7.5%, of the PBHG Technology & Communications Fund and $53 million, or 8%, of the PBHG Emerging Growth Fund.
The complaint further alleges that Gary Pilgrim made millions of dollars in profits by creating a hedge fund named Appalachian Trails (”Appalachian”) with his wife and closest associates for the purpose of engaging in short-term trading of mutual funds. While ordinary investors were limited to four trades per year into and out of the PBHG Funds, both Pilgrim and Baxter made explicit exemptions for Appalachian and other select investors. While Pilgrim and his cohorts made multi-million dollar profits from the illicit trading of the PBHG Funds, ordinary long-term investors lost as much as 60% of their investments in 2000 and 26% in 2001.
The complaint further alleges that Harold Baxter, another principal of PBHG, provided nonpublic portfolio information to Wall Street Discount Corporation (”WSDC”), a brokerage firm run by Alan Lederfeind, who in turn passed that information on to other clients. By having access to the PBHG Funds’ portfolios, these select clients were able to employ sophisticated hedging strategies in timing the PBHG Funds. Indeed, an internal PBHG document reveals that “[a]pproximately $35,000,000 of theses [sic] assets are attributable to accounts managed by Alan Lederfeind.” Furthermore, the document states that PBHG formally “exempted Mr. Lederfeind’s accounts from the policy with the understanding that he can only trade in the Growth, Emerging Growth and Technology & Communications Funds . . . .”
Throughout this period, PBHG Funds’ prospectuses stated shareholders were limited to four exchanges per year between a PBHG money market fund and a PBHG stock fund. In fact, internal PBHG documents and policies acknowledged that market timing was detrimental to long-term shareholders and that exchange limitations were in their best interest. Nevertheless, the special relationship between insiders and select customers prevailed, as market timing persisted. As further alleged in the complaint, various brokers and financial institutions also participated in the market timing schemes, to the detriment of ordinary investors. None of the above detailed material information was disclosed to the members of the Class during the Class Period.
In addition to the profits from their market timing and exchange of insider information, PBHG also profited by charging ordinary investors “in excess of $250 million” in management fees while breaching their fiduciary duties to those very same investors.
The Funds, and the symbols for the respective Funds, are as follows:
PBHG Growth Fund (Nasdaq: PBHGX); PBHG Emerging Growth Fund (Nasdaq: PBEGX); PBHG Large Cap Growth Fund (Nasdaq: PBHLX); PBHG Select Growth Fund (Nasdaq: PBHEX), formally known as PBHG Select Equity Fund (Nasdaq: PBHEX); PBHG Focused Fund (Nasdaq: PBFVX), formally known as PBHG Focused Value Fund (Nasdaq: PBFVX); PBHG Large Cap Fund (Nasdaq: PLCVX), formally known as PBHG Large Cap Value Fund (Nasdaq: PLCVX); PBHG Large Cap 20 Fund (Nasdaq: PLCPX); PBHG Strategic Small Company Fund (Nasdaq: PSSCX); PBHG Disciplined Equity Fund (Nasdaq: PBDEX); PBHG Mid-Cap Fund (Nasdaq: PBMCX), formally known as PBHG Mid-Cap Value Fund (Nasdaq: PBMCX); PBHG Small Cap Fund (Nasdaq: PBSVX), formally known as PBHG Small Cap Value Fund (Nasdaq: PBSVX); PBHG Clipper Focus Fund (Nasdaq: PBFOX); PBHG Small Cap Value Fund (Nasdaq: PSMVX), formally known as TS&W Small Cap Value Fund, LLC (Nasdaq: PSMVX); PBHG REIT Fund (Nasdaq: PBRTX); PBHG Technology & Communications Fund (Nasdaq: PBTCX) PBHG IRA Capital Preservation Fund (Nasdaq: PBCPX); PBHG Intermediate Fixed Income Fund (Nasdaq: PBFIX); PBHG Cash Reserves Fund (Nasdaq: PBCXX)
Note: PBHG family of funds (the ‘Funds’) is operated by the subsidiary of South African based financial services company, Old Mutual plc (LSE: OML), Old Mutual Asset Management and its member firm Pilgrim Baxter & Associates, Ltd. (’Pilgrim Baxter’)