PIMCO Agrees to Pay Almost $20M to Settle SEC Charges That It Misled Exchange-Traded Fund Investors

Pacific Investment Management Company (PIMCO) has agreed to settle the U.S. Securities and Exchange Commission’s charges accusing the firm of misleading investors about the performance of one of its exchange-traded funds and not placing an accurate value on certain fund securities. As part of the settlement, PIMCO will pay almost $20M and hire an independent compliance consultant.

The regulator contends that investors were drawn to the Pimco Total Return Active ETF after, within months of its launch in 2012, it did well enough to outperform the investment management firm’s flagship mutual fund. The fund was previously managed by Bill Gross, PIMCO’s co-founder, and it was intended to mirror PIMCO’s flagship Total Return Fund.

Although Pimco Total Return Active ETF’s initial success is linked to the smaller-sized bonds that were purchased to help boost early performance, in its yearly and monthly reports PIMCO purportedly gave investors other reasons for these early results that were “misleading.” Meantime, the SEC said, PIMCO did not disclose that the initial performance success was a result of an “odd lot strategy”—referring to the purchase of the smaller bonds, which were non-agency mortgage-backed securities—and that this approach that would not be sustainable as the fund continued to grow.

The Commission said that misleading investors about the actual long-term impact of its strategy denied them the chance to make fully informed decisions about investing in the ETF. Addressing PIMCO’s exchange-traded fund case, SEC Enforcement Division Director Andrew J. Ceresney noted that it is the job of investment advisers to provide an accurate assessment of investment strategies employed, as well as any “significant sources of performance.”

The SEC believes that the odd lot strategy that PIMCO used caused the ETF to overvalue its portfolio, resulting in its failure to give an accurate price to a subset of fund shares. In its order, the Commission said that it believes the investment management firm valued the bonds with prices that a third-party vendor provided for round lots, which are not the same as odd lots.

The regulator said that this caused PIMCO to overstate the net asset value of the Total Return ETF by up to 31 cents every day for four months. Ceresney contended that this is because PIMCO’s polices and procedures were not designed in a manner to properly address odd lot pricing.

Although settling and consenting to the SEC’s order, PIMCO is not denying or admitting to the findings. The Commission said that the firm violated sections of the Investment Advisers Act of 1940, a section of the Investment Company Act of 1940, and Rules 206(4)-7 and 206(4)-8.

Of the nearly $20M the PIMCO agreed to pay, $18.3M is a financial penalty, more than $1.3M is disgorgement, and $198K is interest.

The independent compliance consultant, whom the SEC must approve, will evaluate PIMCO’s company polices and procedures as they pertain to odd lots. The consultant will put together a report with recommendations and findings to both the Commission and the firm. According to the Los Angeles Times, any recommendations that the consultant and the regulator decide is warranted, Pimco will have to adopt.

Contact our exchange-traded fund fraud lawyers at the SSEK Partners Group to explore your legal options.

Read the SEC Order in the PIMCO Case (PDF)