The rampant market-timing at Pilgrim Baxter & Associates that spurred regulatory action from New York Attorney General Eliot Spitzer and the SEC was motivated by a drive to raise assets and attract a buyer, according to next week’s edition of Fortune.

Gary Pilgrim and Harold Baxter, an unlikely duo who joined forces to launch Pilgrim in 1982, reportedly kicked themselves for selling out to United Asset Management for $135 million in 1995 when peer boutique firms fetched much larger prices. Pilgrim and Baxter, who had since adopted lavish lifestyles, doled out generous bonuses to themselves and employed numerous tactics aimed at wresting additional income from the firm, according to the expose.

But problems came to a head in 1998 when the firm’s $5 billion flagship fund, PBHG Growth, suffered tremendous losses and UAM began shopping for another buyer. Pilgrim and Baxter then saw another opportunity to profit from another transaction and struck a deal with Edward Stern, general partner at Canary Capital, to facilitate rapid trades in exchange for an influx of fresh assets. After Nationwide Insurance walked away from a deal to buy Pilgrim Baxter for $600 million in 1998, the partners finally struck gold when Old Mutual acquired UAM two years later for $2.2 billion. Under the terms of the deal, Old Mutual paid Pilgrim and Baxter $400 million to sever their revenue-sharing agreement signed with UAM.

$1 Billion in Gains

Pilgrim Baxter’s schemes led to a feast for regulators and a nightmare for Old Mutual. Bogle Financial Markets Research Center estimates that shareholders who bought Pilgrim Baxter’s star funds by Jan. 1, 1996 collectively lost $3 billion, while the partners pocketed roughly $1 billion during that period. Regulators attribute roughly 25% of the investors’ losses to market-timing schemes. David Bullock, who recently assumed the reigns as CEO, faces a long climb in rebuilding the firm’s credibility, the Fortune piece concludes.

__

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.