S.E.C. v. Treadway

• Decision Date: 09 May 2006
• Docket Number: No. 04 Civ. 3464(VM).,04 Civ. 3464(VM).
• Citation: 430 F.Supp.2d 293
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Stephen J. TREADWAY and Kenneth W. Corba, Defendants.
• Court: U.S. District Court — Southern District of New York

430 F.Supp.2d 293

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Stephen J. TREADWAY and Kenneth W. Corba, Defendants.

No. 04 Civ. 3464(VM).

United States District Court, S.D. New York.

May 9, 2006.

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Dorothy Heyll, Jose F. Sanchez, Richard G. Primoff, U.S. S.E.C., New York, NY, Sam S. Puathasnanon, U.S. S.E.C., Los Angeles, CA, Nicolas Morgan, Rachel Lois Izower, U.S. S.E.C., New York, NY, for S.E.C.

Maxine Gail Sleeper, Alan Levine, Kronish Lieb Weiner & Hellman, L.L.P., New York, NY, for Stephen J. Treadway.

Abigail Kaufman Hemani, Adam B. Ziegler, Goodwin Procter LLP, Boston, MA, David B. Pitofsky, Richard Mark Strassberg, Goodwin Procter, LLP, New York, NY, for Kenneth W. Corba.

DECISION AND ORDER

MARRERO, District Judge.

TABLE OF CONTENTS

                I. BACKGROUND ...............................................................  298
                 II. FACTS ....................................................................  300
                 A. THE PARTIES ...........................................................  300
                     B. THE ARRANGEMENT .......................................................  303
                     C. CANARY'S TRADING ACTIVITY .............................................  307
                        1. Initial Investments in Select Growth and Other Funds ...............  307
                        2. Trading Activity in Target, Growth and Innovation Funds
                             Investment in Select Growth Fund .................................  308
                        3. Investments in Horizon Fund and Opportunity Fund ...................  309
                        4. Total Number of Round Trips in the Opportunity, Growth, and
                             Target Funds .....................................................  309
                        5. Fees and Bonuses ...................................................  310
                     D. THE PIMCO FUNDS' DISCLOSURES ..........................................  310
                        1. The Prospectus and Other Disclosure Documents ......................  310
                        2. Other Evidence of the PIMCO Funds' Market Timing Policies ..........  313
                     E. HARM TO SHAREHOLDERS AND TO THE FUNDS .................................  315
                     F. TERMINATION OF THE CANARY RELATIONSHIP ................................  317
                     G. ADDITIONAL FACTS ......................................................  320
                III. MOTION TO STRIKE THE KOHLER DECLARATION ..................................  321
                IV. MOTIONS FOR SUMMARY JUDGMENT .............................................  322
                    A. LEGAL STANDARD .........................................................  322
                    B. DISCUSSION .............................................................  323
                       1. Section 10(b) of the Exchange Act and Rule 10b-5 ....................  323
                          (a) Disputed Issues of Fact Exist As to Whether a Material
                                 Misrepresentation or Omission Was Made .......................  324
                          (b) Material Issues of Fact Exist As to Whether Corba Made a
                                Material Omission .............................................  326
                          (c) Material Issues of Fact Exist As to Whether the
                                Misrepresentations or Omissions Were Material .................  329
                          (d) Scienter ........................................................  331
                               (i) Treadway's Scienter ........................................  332
                              (ii) Corba's Scienter ...........................................  334
                       2. Aiding and Abetting Liability .......................................  336
                          (a) Primary Violations ..............................................  337
                              (i) Violations of Section 10(b) of the Exchange Act and Rule
                                    10b-5 Thereunder by PAFM, PEA, and PAD ....................  337
                             (ii) Violations of Sections 206(1) And 206(2) of the Investment
                                    Advisers Act by PAFM and PEA ..............................  338
                

                          (b) Knowledge of the Primary Violations .............................  339
                          (c) Substantial Assistance ..........................................  339
                       3. Section 17(a) of the Securities Act .................................  340
                       4. Section 34(a) of the Investment Company Act .........................  340
                       5. Section 36(a) of the Investment Company Act .........................  340
                          (a) Treadway ........................................................  343
                          (b) Corba ...........................................................  345
                       6. Remedies ............................................................  346
                 IV. ORDER ....................................................................  346
                

The Securities and Exchange Commission ("SEC") brought this action alleging violations of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77a et seq., Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78a et seq., Investment Company Act of 1940 ("Investment Company Act"), 15 U.S.C. §§ 80a-1 et seq., and Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. §§ 80b-1 et seq., by defendants Stephen Treadway ("Treadway") and Kenneth Corba ("Corba"), who served as executive officers of various investment services and mutual funds referred to as the "PIMCO Entities" or "PIMCO."¹ Pending before the Court are the SEC's and Corba's motions for summary judgment. Also pending before the Court is Corba's motion to strike the declaration of Aaron Kohler (the "Kohler Declaration") or in the alternative to compel compliance with the Federal Rules of Civil Procedure. For the reasons set forth below, the Court denies the motions of the SEC and Corba for summary judgment. The Court also denies Corba's motion to strike the Kohler Declaration.

I. BACKGROUND

The SEC filed suit against Treadway, Corba and various PIMCO entities on May 4, 2004, alleging violations of various provisions of the federal securities laws. Familiarity with the allegations set forth in the complaint is assumed, as these were discussed at length in the Court's previous decisions denying Treadway's and Corba's motions to dismiss. See PIMCO I, 341 F.Supp.2d at 454; SEC v. Treadway, 354 F.Supp.2d 311 (S.D.N.Y.2005) ("PIMCO II").² In sum, the SEC alleges that Treadway and Corba arranged and approved an arrangement granting Canary Capital Partners LLC special market timing privileges in its investments in certain PIMCO funds in exchange for long-term or "sticky asset" investments in other PIMCO funds, and that this arrangement conflicted with PIMCO's public disclosures regarding market timing. While PIMCO publicly took a stance against market timing investment strategies, as reflected in both an anti-market timing statement in its Prospectus³ as well as systematic actions taken by PIMCO employees against many investors to deter market timing, at the same time it allowed Canary Capital Partners LLC to have special market timing privileges, which was materially misleading to investors. According to the SEC, Treadway's and Corba's activities thus violated the anti-fraud provisions of the securities laws, as well as the fiduciary duties imposed on them, as executive officers of several PIMCO Entities, under the Investment Company Act and the Advisers Act.

As is to be expected, Treadway and Corba present vastly different versions of the events. These competing stories, as well as the evidence marshaled to support them, will be set forth below. In sum, however, Treadway and Corba point fingers at each other. Treadway portrays himself as an innocent victim of Corba's deceptive actions. If Treadway is to be believed, he was a staunch defender against market timing abuses in the PIMCO Entities, who was tricked by Corba into approving an arrangement that, unbeknownst to him, involved market timing. By his account, as soon as Treadway realized the truth of the matter, he took steps to limit and stop further abuses. In contrast, Corba denies any form of deception on his part, insisting that he fully disclosed the arrangement to Treadway and received his seal of approval. Even more fundamentally for purposes of his motion, however, Corba insists that he did not make any misleading statement or omission, and that he was not aware of any "disjunction" between the Prospectus and the Canary arrangement. Corba vigorously denies any responsibility for any portion of the Prospectus alleged to be misleading and claims that in light of the "green lights" he received from Treadway, he had no reason to know that the Canary arrangement might be problematic. As Corba characterizes the Canary arrangement, it was a "global relationship" involving some active trading along with longer term investments, rather than a "quid pro quo" whereby Canary Capital Partners LLC received market timing privileges in exchange for the long-term investment of significant sums. Corba also requests summary judgment on the Investment Company Act claims on the ground that he is not an "investment adviser" as defined under that statute.

To support their respective positions, each party has presented a voluminous record of evidence, including documents, deposition transcripts, and interrogatories. As explained below, the Court finds that the evidence presented demonstrates that disputed issues of material fact exist on every claim, precluding summary judgment for any party.

II. FACTS⁴

A. THE PARTIES

PIMCO Funds: Multi-Manager Series (the "PIMCO Funds") was a registered investment company comprised of 45 separate investment series or mutual funds. The PIMCO Funds was governed by a Board of Trustees. The PIMCO Funds offered up to six classes of shares of each of its funds.

The PIMCO Funds contracted with various providers for services necessary to operate the investment series or mutual funds. PA Fund Management LLC ("PAFM"), Formerly known as PIMCO Advisors Fund Management LLC, is an investment adviser registered with the SEC with...