Old Mutual shares drop amid scandal

The share price of Old Mutual (OM) in London and Johannesburg dropped 2,5% over five days this week, following the announcement that its United States subsidiary, mutual fund managers Pilgrim Baxter, has been charged with improper trading conduct.

OM’s London share price fell from 100,25p to 97,75p and its local price from 1 110c to 1 055c.

The Attorney General of the state of New York, Eliot Spitzer, and US watchdog body the Securities and Exchange Commission (SEC), have also charged Pennsylvania-based Pilgrim Baxter’s co-founders, chairperson Gary L Pilgrim and CEO Harold J Baxter. The accused have less than a week to enter pleas.

To compound matters, OM, Old Mutual Asset Management (US) and Pilgrim Baxter and Associates have been cited in a class-action suit filed by institutional investors and pri- vate policy-holders in a Pennsylvania circuit court. According to Tucker Hewes, Old Mutual Asset Management’s spokesperson in the US, the responsibilities “are expected to enter pleas soon”.

The case revolves around charges that the company earned large management fees, possibly running into several hundreds of millions of dollars, as a result of suspect trades. Pilgrim and Baxter allegedly profited from these trades and individually earned millions of dollars.

Before the charges were filed, and after an internal inquiry, the two executives agreed to resign. The company said Baxter had also undertaken to return the “personal profits” and “management fees” he received from “improper trading”.

Despite this, OM agreed to pay the pair a final severance package totalling close to $20-million each. Pilgrim Baxter was a subsidiary of United Asset Management Incorporated when, in 2000, OM bought the latter for $2,2-billion. At the time, the subsidiary was valued at close to $700-million.

After a number of strategic dis- posals, Pilgrim Baxter became part of the renamed Old Mutual Asset Managers (US) and one of OM’s most prominent forays into the global asset management market. The US mutual fund industry is estimated to manage more than $7-trillion and is entrusted with a large slice of the retirement savings invested either by individuals or by pension funds.

At the centre of the federal case is a ruse used by traders known as “market timing”, whereby unit trusts held by long-term investors are sold and then repurchased. Profits are made on the huge volumes traded, although the change in the actual value of the stocks held in the unit trust may only fluctuate by a fraction of a cent.

Such transactions are apparently not illegal. But the practice is in breach of internal rules set by Pilgrim Baxter limiting the number of times they can be performed each year and who can perform them.


Pilgrim is accused of using Appalachian Trails, a Connecticut-based specialist fund he established with his wife and two others.

In less than a year, according to the charges, Appalachian was involved in 90 trades with a fund Pilgrim managed at Pilgrim Baxter — far more than the four annual transactions sanctioned by the company.

Also at issue is whether all Pilgrim Baxter’s directors knew the two firms were trading and who authorised the trades.

According to the SEC, Appalachian traded in more than $3-billion of funds, making nearly $13-million of which Pilgrim personally netted $3,9-million.

The SEC and Spitzer have accused Baxter and a “close personal friend”, Alan Lederfeind of New York brokerage Wall Street Discount Corporation, of being privy to information supplied by Baxter and others at Pilgrim Baxter.

By providing details about the holdings of funds under Pilgrim Baxter’s management, Baxter allegedly helped to create favourable investment conditions, influence decisions and increase the trading volumes of certain shares and Pilgrim Baxter-managed mutual funds.

The result of greater trading volumes was “larger management fees”, which Baxter and Lederfeind allegedly shared.

The charges relate to 1998, before OM purchased the company, and it is unclear whether the offending practices continued after the purchase.

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