Old Mutual US arm faces £148m bill

OLD Mutual's US group Pilgrim Baxter could face settlement costs of $250m (£148m) over trading violations in the widening mutual funds scandal.

US regulators have brought charges against the two founders of Pilgrim Baxter, threatening to make an example of the firm as they themselves face pressure to get tougher on trading violations.

Both state and federal officials promised to force the fund company to pay hundreds of millions of dollars in restitution to investors.

The charges come at a bad time for Old Mutual, which is looking for a major UK acquisition. The company spent $400m buying Pilgrim Baxter in the late 1990s and may have to pay the founders around $30m more in severance.

New York Attorney General Eliot Spitzer filed civil charges against Gary Pilgrim, Harold Baxter and Pilgrim Baxter & Associates for allowing certain clients, including a hedge fund Gary Pilgrim and Harold Baxter were involved with, to make illegal trades of shares in the PBHG fund family.

The Securities and Exchange Commission also filed charges against the executives.

'The top managers of this mutual fund lost their ethical compass and were unable to distinguish between what was in their shareholders' interest and what was in their own interest,' Spitzer said. The two men have resigned.

Spitzer said he intended to force the company to pay back to investors all the management fees it received during the period that the suspect trades were carried out. Experts say this could amount to around $250m.

This is the first time the regulators are believed to have demanded full restitution of management fees from a fund company, although some firms have volunteered to repay unspecified amounts to their investors.

The pair are only the latest mutual fund executives to be charged in the widening investigation into fraud and misdemeanours in the industry.

Pilgrim Baxter is nowhere near as large as some firms involved, such as Alliance Capital and Putnam Investments, which have already been targeted by Spitzer and the SEC, and a $250m payment would be a substantial financial blow.