“Mutual-fund executive Gary Pilgrim made millions of dollars in profits from a hedge fund that engaged in short-term trading of his firm’s mutual funds during the bear market, a time when other investors in those funds were suffering losses, according to state and federal civil charges made against Mr. Pilgrim Thursday,” writes Tom Lauricella in today’s Wall Street Journal.

“Meanwhile, Harold Baxter, who co-founded Pilgrim, Baxter & Associates with Mr. Pilgrim in 1982, was giving nonpublic portfolio information to a friend who ran a small brokerage firm, who in turn passed that information on to other clients who conducted rapid trades in Pilgrim Baxter’s PBHG family of funds, according to the charges.”

“These allegations were included in charges of civil fraud and breach of fiduciary duty filed Thursday by the New York Attorney General Eliot Spitzer and the Securities and Exchange Commission against Messrs. Pilgrim and Baxter and Pilgrim Baxter, a Wayne, Pa., fund firm overseeing $7.4 billion in assets.”

“The case had been expected after the two fund-company executives resigned last week in the face of the state and federal probes into improper trading of PBHG Funds.”

“David J. Bullock, who was named chief executive officer of Pilgrim Baxter after the resignations, said in a statement Thursday that although the firm, a unit of Old Mutual PLC, was cooperating with authorities and disapproved of the pair’s alleged actions, ‘we do not agree with all the factual allegations or legal conclusions contained in the complaints.’ Messrs. Baxter and Pilgrim, and their attorneys, couldn’t be reached for comment.”

“New York state said it is seeking the surrender, or disgorgement, of all management fees, which it estimated to be ‘in excess of $250 million,’ which the defendants received during the period that improper share trading was permitted at PBHG Funds. Mr. Spitzer had previously said he would try and force fund companies to do more than just reimburse investors for the specific damages caused by market timing, but this complaint marks the first time such an attempt has actually been made. A penalty of that magnitude would dwarf other fines handed out thus far in enforcement actions related to the fund probe. For example, Canary Capital Partners LLC, the hedge fund at the center of Mr. Spitzer’s initial civil complaint for improper trading of mutual-fund shares, agreed to pay $40 million in fines and restitution. Canary settled the charges without admitting or denying wrongdoing.”

“The latest charges could mark an ignominious end to the careers of Mr. Baxter, 57 years old, and Mr. Pilgrim, 63, whose mutual funds were wildly popular during the mid-1990s. At its peak in late 2000, Pilgrim Baxter managed approximately $26 billion, but today it oversees about $7.4 billion, including 18 mutual funds. The firm’s current parent, Old Mutual, is a South African-based financial-services firm whose shares trade in London. A spokeswoman for Old Mutual referred calls to a PBHG spokesman in New York, who issued Mr. Bullock’s statement.”

“The accusations against Messrs. Baxter and Pilgrim are the latest example of top officers at mutual-fund companies being linked to ‘market-timing’ arrangements. The SEC and Massachusetts regulators previously have filed charges against portfolio managers at Marsh & McLennan Cos.’ Putnam Investments for market-timing the firm’s funds, and authorities have contended that Strong Funds founder Richard Strong engaged in improper trading of his firm’s funds, but no charges have been filed.”