Last updated: 11:16 / Thursday, 6 August 2015
Under Investigation

PIMCO Gets a Wells Notice from SEC, a Lawsuit Could Be Coming

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PIMCO Gets a Wells Notice from SEC, a Lawsuit Could Be Coming

Bond giant Pacific Investment Management Co., commonly known as PIMCO, said that it is under investigation by the country’s top securities regulator over how it valued assets in one of its most popular funds aimed at small investors, according to Wall Street Journal.

The PIMCO Total Return Active ETF, an exchange-traded fund previously managed by star investor Bill Gross, has been under investigation by the Securities and Exchange Commission for at least a year for allegedly artificially boosting returns from its trading of certain mortgage bonds. This investigation was first reported in September 2014.

The SEC has been looking at how PIMCO purchased and valued certain bonds in the ETF portfolio. Specifically, the SEC has been examining whether the fund bought these mortgage investments at discounted prices, but relied on higher valuations for the investments when the fund calculated the value of its holdings shortly thereafter.

PIMCO disclosed in a news release early this week that it received a so-called Wells notice from the SECconcerning the ETF, which means the agency’s staff intends to recommend a civil action against the firm related to its investigation. The notice isn’t a formal allegation of wrongdoing and won’t necessarily lead to an enforcement action.

The SEC is looking at a four-month time period between the fund’s launch on Feb. 29, 2012 and June 30, 2012, examining how PIMCO valued smaller-size positions in non-agency mortgage-backed securities purchased by the ETF during that time, according to the release. The agency is looking at the fund’s performance disclosures for that period, and at PIMCO’s compliance policies and procedures. While Bill Gross was still at PIMCO, he spent at least a day being interviewed by SEC officials. The SEC also has interviewed fund trustees and other executives at PIMCO.

In the release, the firm said that the Wells process “provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards and that no action should be taken. We will continue to engage with the SEC and we are confident that this matter will not affect our ability to serve our clients.”

A spokesman for the SEC declined to comment.

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