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Mutual Fund Founders Leave After Insider Trading Discovery

By Gretchen Morgenson

The New York Times -- Trying to contain deepening investor mistrust, one large mutual fund company ousted its founders on Thursday and another settled a securities fraud case brought against it just over two weeks ago.

PBHG Funds, an 18-year-old fund company in Wayne, Pa., that ran some of the hottest investment portfolios during the 1990s, announced it had removed co-founders Harold Baxter and Gary Pilgrim on Thursday. The ouster followed the discovery that Pilgrim had invested in a private partnership that had been allowed to buy and sell frequently the shares of PBHG Funds between March 2000 and December 2001. Such trading, known as market timing, often uses portfolio information not available to other shareholders, and the frequent trading also increases costs for other investors.

Baxter, who was not an investor in the partnership, was aware of its trading in PBHG funds, the company said.

Meanwhile, management at Putnam Investments in Boston settled on Thursday the securities fraud lawsuit brought by regulators on Oct. 28, agreeing to restrict its employee trading, heighten scrutiny of employees’ practices and strengthen the independence of its fund directors. In its suit, the Securities and Exchange Commission alleged that Putnam had failed to deter and disclose improper and opportunistic trading by a handful of its fund managers who bought and sold shares of funds they oversaw.

Both of the moves indicate how eager fund companies are to put their involvement in the widening scandal behind them. Both companies continue to be under investigation by state and federal regulators.

But even as federal regulators said they were pleased with the settlement they had struck with Putnam, state regulators in Massachusetts and New York who are continuing to investigate the fund company criticized the agreement, calling it a capitulation by the SEC.