NEW YORK (CNN/Money) - In a letter to clients Friday, PIMCO's star bond fund manager and chief investment officer Bill Gross defended PIMCO against charges of improper trading filed by state regulators this week.
On Tuesday, New Jersey regulators sued four entities related to PIMCO mutual funds, saying they defrauded investors by allowing Canary Capital Partners LLC, a hedge fund at the center of an industry-wide scandal, to improperly trade in PIMCO funds.
The improper trades, the complaint alleged, involved market timing, which is the frequent "in and out" trades of mutual fund shares to exploit market conditions and inefficiencies in the way mutual funds are priced. While market timing per se is not illegal, PIMCO had policies to police and stop so-called market timing of its funds, the complaint said. And PIMCO also had specific limits on the frequency an investor could buy and sell a particular fund, known as "round trips."
The complaint also alleges the defendants provided Canary with additional information, not disclosed to other investors, on the specific holdings of the mutual funds. That information would have put Canary in a unique position to engage in market timing transactions and to hedge their investments, according to the complaint.
Emphasizing his and PIMCO's long-standing philosophy of putting clients first, Gross wrote that while Canary was an investor in PIMCO funds, Canary traded in the funds "with and without our knowledge. The investments we knew about, clearly acknowledged as 'timer' money, were made under an arrangement that did not violate the shareholder protection of our prospectuses, and which had monitoring provisions to prevent excessive trading. ...
"To our knowledge, this Canary trading was infrequent, did not come close to violating the prospectuses and harmed no shareholders in the fund. In perfect hindsight, we wish we had never attracted the name Canary/Stern ... . But we can't change that and if any investor in our funds was disadvantaged by this arrangement, then we want to give assurance we will make it up--in full."
In response to the charges, including that PIMCO allowed Canary to temporarily park cash or what's known as "sticky assets" in several PIMCO funds, Gross wrote, "To the best of our knowledge, PIMCO has never had any arrangements pertaining to 'sticky funds', late trading/stale pricing arbitrage, or improper dissemination of fund holdings."
The complaint filed by New Jersey Attorney General Peter C. Harvey and Franklin L. Widmann, chief of the New Jersey Bureau of Securities, alleges numerous violations of state securities law. The complaint seeks disgorgement of illegal profits, restitution for investors and civil monetary penalties.
"The defendants bent over backwards to help this big investor profit at the expense of ordinary investors who entrusted their hard-earned savings to them," Harvey said.
Last week, a spokesman for PIMCO said Canary Capital had misled PIMCO on its investment plans with PIMCO mutual funds.
The defendants named in the suit are Allianz Dresdner Asset Management of America LP, the parent of the PIMCO mutual fund group,
Pacific Investment Management Co. LLC, PIMCO Advisors Distributors LLC and PEA Capital LLC.
-- Reuters contributed to this story.
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