What brings on such censure? The company’s most public black eye concerns two 1993 advertisements that have become famous in mutual-fund circles. One ad claimed: “Our family of ARM [adjustable-rate mortgage] Funds swept the competition: numbers 1 through 5.” Morningstar’s Phillips wrote an editorial criticizing the ads for not making it clear that each fund earned its ranking in a separate category, determined by Lipper Analytical, a Summit, N.J., mutual-fund research company. Pilgrim sued Morningstar for libel, but a California state appeals court threw out the suit earlier this year. An NASD committee subsequently decided that Weingarten’s “conduct was intentional with respect to the false and misleading statements . . . in the advertisements.” In addition to the suspension, it suggested that Weingarten be fined $100,000. Pilgrim is appealing the recommendation. NASD is likely to reach a final decision this fall.
Weingarten, a onetime broker at Dean Witter Reynolds, managed money at Chase Manhattan before becoming Pilgrim’s chief executive in 1984. In 1989 she bought Pilgrim from First Capital Holdings, a company then owned and run by her husband, Robert. Under her leadership Pilgrim has introduced some top-performing adjustable-rate-mortgage funds. But her company has also acknowledged acting improperly in managing money entrusted to it. In ad-dition to its mutual funds, Pilgrim manages money for insti-tutions. While running First Capital’s pension plan, Pilgrim invested more than 10 percent of the plan’s money in First Capital’s own stock. Ted Co-hen, Pilgrim’s general coun-sel, admits that the outsize investment exceeded the feder-al limits applying to pension funds. Pilgrim settled a suit over this issue for $4.25 million in February.
Pilgrim has also displayed some untidy practices at its mutual funds. At the end of 1992, more than 18 percent of Pilgrim’s Corporate Utilities Fund was invested in a single low-rated preferred-stock issue – an unusually large and risky investment for an ostensibly conservative fund. In January of 1993, Pilgrim marked down the value of the fund’s holding, causing the fund to instantly lose nearly 9 percent of its value. But Weingarten didn’t deem it necessary to flag the writedown in her letter to shareholders. “The fund is priced on a daily basis, so every day’s prices reflect the value of the securities in the portfolio,” says Pilgrim’s Cohen.
Another Pilgrim fund exceeded the borrowing lim-its set in its prospectus. The Pilgrim GNMA Fund is allowed to borrow up to 10 percent of its assets “for temporary or emergency purposes.” But according to a letter sent to the NASD by Robert Grunburg, Pilgrim’s former president, its borrowings hit 30 percent in 1992. The letter also suggests that Pilgrim management deliberately tried to obscure this violation in the fund’s year-end report. Pilgrim did not respond to calls seeking comment.
But pressure from regulators is finally having an effect. This week Pilgrim plans to announce that it will add staff and adopt guidelines to “enhance com-pliance sensitivity.” One new measure is a voluntary program of filing all advertisements with the NASD prior to publication. Does the “voluntary” program have anything to do with NASD’s order in May that Pilgrim submit all ads and sales materials before using them? “We started filing advertisements long before the NASD’s decisions came down,” says Cohen. “We are interested in developing a positive relationship with our regulators.” And investors, no doubt, are interested in having regulators’ eyes on Pilgrim.
