December 1, 2016

Investment management firm Pacific Investment Management Company (PIMCO) will retain an independent compliance consultant and pay nearly $20 million to settle SEC charges that it misled investors about the performance of one of its first actively managed exchange-traded funds (ETFs) and failed to accurately value certain fund securities.  According to the SEC’s order, PIMCO’s Total Return ETF attracted significant investor attention as it outperformed even its flagship mutual fund in the four months following its launch in February 2012.  The initial performance was attributable to buying smaller-sized bonds known as “odd lots” as part of a strategy to help bolster performance out of the gate.  But in monthly and annual reports to investors, PIMCO provided misleading reasons for the ETF’s early success and failed to disclose that the resulting performance from the odd lot strategy was not sustainable as the fund grew in size.  The SEC’s order also finds that PIMCO’s odd lot strategy caused the Total Return ETF to overvalue its portfolio and consequently fail to accurately price a subset of fund shares.  PIMCO valued these bonds using prices provided by a third-party pricing vendor for round lots, which are larger-sized bonds compared to odd lots.  PIMCO blindly relied on these prices without any reasonable basis to believe they accurately reflected what the fund would receive if it sold the odd lots.  As a result, PIMCO overstated its net asset value almost every day for four months.  SEC

Tagged in: Financial and Investment Fraud, Misrepresentations,