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Thursday, June 22, 2006

The Burden of Market Timing

by: Marie Glancy

A former portfolio manager for PEA Capital took the stand Wednesday in the trial of former PIMCO Advisors Distributors CEO Stephen Treadway, and recounted his dismay upon learning that his fund had been opened to market-timed trades by financier Edward Stern.

During Dennis McKechnie's afternoon examination by attorney for the SEC, Adam Schneir, it seemed as though former PEA Capital executive Kenneth Corba was standing trial after all. Corba settled civil fraud charges last week for $200,000 without admitting or denying wrongdoing. Treadway, named in the same complaint, is arguing before a U.S. District court that he never knew of the market-timing practices Corba approved.

After calling an impromptu meeting of PEA managing directors -- of which McKechnie was one -- in the fall of 2001, Corba announced he would be meeting with Stern shortly, McKechnie testified before Judge Victor Marrero and an attentive eight-person jury. In the wake of 9/11 and slumping markets, he said, Corba seemed excited to have good news.

“In a way, I think it was intended to ... prop people up,” said McKechnie, who managed the PIMCO Innovation Fund from 1998 to 2005. “There was the potential that someone with a large pool of assets would possibly be making an investment in our firm.”

But in early 2002, Corba returned to the managing directors with the news that Stern would make investments in four PEA funds, of which three would be “short-term in nature,” McKechnie said. These short-term interests would involve three to four “round-trip” trades a month. At this point, Stern had just made his first large investment in the Innovation Fund, McKechnie said.

“I viewed it as disruptive and I told [Corba] so ... this was like trying to drive a car and someone pulling at the wheel whenever they felt like it,” said McKechnie of Stern's large investments and withdrawals. He said Stern remained invested in the fund for “a few weeks,” at which point he withdrew the last of his money for reasons unknown to McKechnie.

In cross-examination, the defense clarified that Stephen Treadway was not present at two meetings in which Corba discussed his dealings with Stern. McKechnie confirmed this, and that he never spoke to Treadway about the Stern issue. The defense also tried to establish that the interests of a portfolio manager are typically closely aligned with those of individual investors in their funds.

Also Wednesday afternoon, two SEC employees read through portions of a deposition made by Treadway to Schneir in February 2004. In the deposition, Treadway came across as uncertain regarding his own titles and responsibilities vis-à-vis the various entities of PIMCO. He did, however, testify that PEA Capital advisors did not report to him.

Roughly a dozen people, including Treadway's family, were present for most of the afternoon's proceedings. Treadway and the head of his legal team, Alan Levine, appeared relaxed during breaks.

Corba is expected to take the stand Thursday. 

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