The Commission's complaint charged that PBA violated the federal securities laws by, among other things, permitting a select group of investors to trade rapidly in and out of the PBHG Funds, reaping profits and diluting the value of the funds to the detriment of long-term investors. Stephen M. Cutler, Director of the SEC's Division of Enforcement, said, "While we continue to press our case against [individual defendants] Harold Baxter and Gary Pilgrim, our settlement with the company they founded represents an important milestone for mutual fund shareholders: We have obtained significant monetary sanctions -- all of which will be used to reimburse investors -- as well as far-reaching compliance and governance reforms designed to prevent the sorts of abuses that gave rise to the SEC's lawsuit."

Ari Gabinet, District Administrator of the Philadelphia District Office, said, "Pilgrim Baxter & Associates was an early and popular haven for some of the best known and most active market timers. The firm allowed these timers to make millions at the expense of ordinary shareholders, who saw the value of their investments in the PBHG Funds plummet. It's a large penalty for a firm of this size, one that balances the size of the firm against the amount of the harm and the nature of the conduct to achieve a meaningful but fair consequence to the firm."

The Commission's Order finds, among other things:

• From at least June 1998 through December 2001, PBA permitted a select group of investors to trade rapidly in and out of certain PBHG funds, reaping profits and diluting the value of the funds to the detriment of long-term investors that the funds purported to cultivate. These rapid timers made significant profits over those years. Similarly, PBA earned advisory fees on these timers' funds. Meanwhile, numerous ordinary investors in the PBHG Funds experienced a decline in the value of their investments.

• Beginning in at least 1996, PBHG Funds prospectuses disclosed that investors would be permitted to make no more than four exchanges per year into the PBHG Cash Reserves Fund from any other PBHG fund. The prospectuses did not disclose any exception to this policy for any investor or investors.

• PBA recognized the fact that the four-exchange limitation was in the best interests of long-term shareholders. PBA internal documents reflect that, at least as early as 1998, PBA recognized the negative impact associated with excessive short-term trading, or market timing, on a portfolio manager's ability to effectively manage the assets of their funds. Nevertheless, from 1998 through mid-2001, more than two-dozen PBHG Funds accountholders conducted short-term trading of the PBHG Funds through the PBHG Cash Reserve Fund that was far in excess of the disclosed limitation of four exchanges per year.

• The detrimental timing permitted by PBA was exacerbated by the self-dealing of its principals and founders, Gary L. Pilgrim and Harold J. Baxter. PBA permitted a hedge fund in which Pilgrim invested to engage in rapid trading of the PBHG Growth Fund, which Pilgrim himself managed. Moreover, PBA provided 30-day stale PBHG portfolio holdings information to the customers of a New York brokerage firm headed by a personal friend of Baxter. These customers, in turn, used this information to facilitate market timing of the PBHG Funds and to exercise hedging strategies through other financial and brokerage institutions.