Risk & Compliance

Pimco Fined $20M for Overvaluing Securities

The SEC says Pimco pursued a pricing strategy that misled investors about the initial performance of an exchange-traded fund in 2012.
Matthew HellerDecember 2, 2016
Pimco Fined $20M for Overvaluing Securities

Pacific Investment Management Co. has agreed to pay nearly $20 million to settle charges that it misled investors about the initial performance of an exchange-traded fund by overvaluing mortgage-backed securities it had purchased.

According to the U.S. Securities and Exchange Commission, the early success of Pimco’s Total Return Active ETF in 2012 was “largely attributable” to the overvaluation of small-sized pieces, or “odd lot” positions, in non-agency mortgage-backed securities that traded at discounts to larger-sized, or “round lot,” positions.

The “odd lot” strategy contributed as much as 54% to the fund’s cumulative performance returns, the SEC said in an administrative order, but Pimco failed to disclose the impact of the strategy and that “the performance resulting from this strategy was not sustainable as the fund grew in size.”

The fund was formerly managed by Pimco co-founder Bill Gross, who left the firm in 2014. To settle the SEC’s charges, Pimco will pay disgorgement of fees totaling more than $1.3 million, interest of nearly $200,000, and a penalty of $18.3 million.

“Pimco misled investors about the true long-term impact of its odd lot strategy and denied them the opportunity to make fully informed investment decisions about the Total Return ETF,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a news release. “Investment advisers must accurately describe the significant sources of performance and the strategies being used.”

The Total Return Active ETF was, according to Reuters, “was once the largest ETF managed by someone who actively decided how the fund’s assets would be invested. Most of the larger ETFs merely track an index.”

During the fund’s first six months, the SEC said, Pimco acquired 156 odd lot positions of less than $1 million in size, using a third-party pricing service to value the positions as though they were larger pieces.

For 43 of those positions, the fund allegedly did not have a reasonable basis to believe that the pricing vendor’s mark accurately reflected the exit price it would receive for those positions but still valued them at the pricing vendor’s mark, resulting in overstatements of net asset value.