Pimco Agrees to Pay $20 Million Over Total Return ETF Values

  • SEC says Pimco misled investors about performance of bond ETF
  • Regulator alleges asset manager overstated value of fund

Pacific Investment Management Co. agreed to pay almost $20 million to settle allegations by the Securities and Exchange Commission that it didn’t properly value securities in an exchange-traded fund formerly run by Bill Gross.

Pimco misled investors about the performance of its Total Return Active ETF and failed to accurately value certain non-agency mortgage backed securities, the SEC said in a statement Thursday. The asset manager inflated the value of the fund by using third-party pricing for large bond purchases while investing in “odd lot” positions, or smaller-sized securities, which were acquired at lower prices, the regulator said.

“Investment advisers must accurately describe the significant sources of performance and the strategies being used,” Andrew Ceresney, head of SEC enforcement, said in a statement.

Pimco co-founder Gross, who left the firm in September 2014, previously managed the active ETF, which launched in March 2012. Pimco, which didn’t admit or deny the SEC’s allegations, agreed to retain an independent compliance consultant. The firm will pay a penalty of $18.3 million, and disgorgement and interest of more than $1.5 million.

“Pimco is committed to conducting its business in a manner that meets or exceeds the expectations of its regulators,” Mike Reid, a spokesman for the Newport Beach, California-based company said in an e-mailed statement. “Accordingly, the firm has enhanced its policies and procedures relating to valuation of smaller-sized positions and performance attribution disclosure.”

‘Odd Case’

After inception, the bond ETF attracted attention for quickly outperforming its mutual fund counterpart, once the largest bond fund in the world. By using higher valuations for some mortgage bonds with $1 million or less in face value for the first four months of the fund’s life, it was able to boost initial performance, according to the SEC. The asset manager failed to disclose to investors that the performance was from the higher value of the odd lots and that it might not be sustainable as the fund became larger, the agency said.

The SEC’s order, which doesn’t mention Gross by name, said the “portfolio manager approved and implemented” the odd lot strategy for non-agency MBS, along with other strategies, to generate early positive returns for the fund.

“The crux of the SEC case is odd” because it calls for different pricing standards when valuing small and large lots of securities, Gross, who now works at Janus Capital Group Inc., said in an e-mailed statement. “The financial markets couldn’t function if that was the case.”

Gold Stars

At the time of the alleged misconduct, Pimco had a "gold star" program to incentivize traders to maximize performance. The ETF’s portfolio manager used the stars, worth $1,000 apiece, to reward traders who purchased non-agency MBS odd lots at lower prices, the SEC said.

“Pimco overstated its NAV almost every day for four months because its policies and procedures were not reasonably designed to properly address issues concerning odd lot pricing,” Ceresney said, referring to the fund’s net asset value.

The Pimco Total Return Active ETF, which currently has $2.3 billion in assets, returned 1.4 percent this year, according to Bloomberg data. The SEC settlement has no effect on the fund’s current value, according to Pimco.

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