Testimonies have finished in the Securities and Exchange Commission's case against former PIMCO Advisors Distributors CEO Stephen Treadway in U.S. District Court in Manhattan. Last to take the stand was Treadway himself, who strove to explain his reasons for giving market timer Edward Stern and Stern's Canary Capital Partners two chances to change trading patterns after noting their frequent orders and redemptions.

The short version is that Treadway was a very busy executive who trusted the assurances of Ken Corba -- a PEA Capital Advisors executive and money manager, who did not report to Treadway -- that market timing was not Stern's default modus operandi and would be closely monitored. "There were six firms competing for my organization's time and attention," Treadway noted, calmly addressing the jury as he explained his duties and activities at PAD. One of these six firms was PEA; another was bond firm PIMCO, twenty times the size of any of the other money managers with which PAD worked.

Defense attorney Stephen Ascher also highlighted details of PAD's policy on market timing, which Treadway said was adopted shortly after he arrived at the company in 1996. As outlined in prospectuses at the time, it stated the fund "reserves the right to terminate" trading in the case of frequent trading that "may be deemed detrimental to the funds." Emphatically, Treadway stated that he understood this wording reserved the fund's right to make judgments on a case-by-case basis.

Treadway's memory of his first conversation with Corba regarding the Stern arrangement seems clearer than Corba's. In January 2002, Treadway said, Corba told him Stern was interested in a long-term relationship with PEA, but only said that "under certain market conditions, they had the potential to be more active traders than we were familiar with ... [Corba] was going to monitor it ... and he had negotiated safeguards." These stipulated that Stern would invest no more than 3 percent of the total of any one fund, Corba would receive notifications of each trade, and Corba had the option of holding Stern's investment in cash.

Treadway said Corba's belief that Stern and his associates would become "good long-term investors" persuaded him to let the relationship proceed, and that Corba never distinguished between Canary's investment in his own Select Growth Fund versus investments in other funds. It has since been shown that Stern's large investment in Select Growth had the characteristics of a long-term investment and may have been arranged as a quid pro quo for market timing in other funds.

Treadway said he trusted Corba to preserve his own reputation as a money manager by looking out for the best interests of his fund and its investors. And it didn't make any sense, Treadway added, that "sophisticated" clients would attempt market timing in a domestic equity fund: "I did not imagine that these people would have a market timing strategy. I did not."

The same reasoning kept Treadway from freezing Stern's trading in April 2002, after it came to his attention that Stern had entered into a period of active trading, completing four round trips in a month. Treadway called Corba for an explanation, he said, and was told that four per month was an "outer limit," driven by market circumstances and strictly temporary.

In June 2002, finding at a staff meeting that the frequent trading had continued, Treadway said he again called Corba and told him the Stern relationship should end. Corba this time said the Stern family was losing money, so that other investors were in fact benefitting, Treadway said. While admitting he found this strange, Treadway said it was "just not intuitive" that Corba would not look out for his fund in every way possible. "He turned me around on that," Treadway said.

Treadway finally decided to terminate trading in August 2002, after returning from vacation. Though he admits meeting with brokers for Canary in October 2002, Treadway said he "absolutely" denies giving permission for continued trading in funds or variable annuities.

The SEC has suggested Treadway was remiss in never disclosing the Stern market timing to his fellow members of the PIMCO Funds' board of trustees. In his testimony Monday, Treadway explained he "would not have discussed individual cases ... with the board in a hundred years" because it was never the board's custom to discuss individual cases. Instead, he said, he "drove and led" a push to impose anti-market timing redemption fees, which the board approved in spring 2002. "I thought this was the knockout punch in that area," Treadway said, pointing out that PAD was ahead of the compliance wave in taking this step.

SEC lawyer Kathryn Pyszka began her cross-examination with a long series of short-answer questions relating to matters already established by previous testimony: Treadway's position within the company in 2002; whether he realized he had a fiduciary duty; whether greater fund assets increased his personal salary, and whether he told the board of trustees about Stern's market timing.

Pyszka appeared in turns impatient and nervous, misspeaking several times and pausing at length between some questions. But, as Treadway attorney Alan Levine had done in cross-examining Corba, she referred Treadway after several responses to his investigative testimony from 2004. For example, asked whether on April 29, 2002 he knew the settlement of Stern trades was causing problems, Treadway said he did not. Pyszka then presented an email from that date, copied to Treadway, in which former PEA vice president of operations, Steve Howell, said the settlements required manual intervention.

The weakest link in Treadway's case, indeed, is a series of emails on which he was copied and which he says he does not remember receiving. But he has consistently argued that he did not routinely involve himself with "operational issues," and the fact that he was only copied on such emails supports this.

On redirect examination, Ascher had Treadway clarify that he believed all Stern's investments to be primarily long-term in nature, and that a "grace period," such as Treadway granted to Canary in January 2002, was granted to all fund investors as a matter of course.

Levine then announced that Treadway rested. Judge Victor Marrero dismissed the jury and conferred with counsel regarding instructions to be given to the jury. Marrero called the SEC's intention to bar Treadway from working in the securities industry, potentially forever, a "drastic remedy." He said that as such, the standard for deciding Treadway committed a breach of fiduciary duty should be "clear and convincing evidence," a higher bar than "preponderance of evidence," which is typically applied in civil cases.

In response, SEC lawyer Sam Puathasnanon said the SEC is seeking only to bar Treadway from servicing as an officer or director of an investment company, not to prevent him from working in the industry. It was not immediately clear whether this represents a tactical change on the part of the SEC.

Puathasnanon also expressed dissatisfaction with the instructions' language pointing out that market timing is not, in itself, illegal. But Marrero agreed with the defense's claim that the court, rather than the defense, holds responsibility for thus informing jurors of the law.

Closing arguments begin Wednesday morning.  

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