PIMCO agrees to settle class action for $92 million

Posted on: January 12th, 2011 by Steve Larson

Bond fund giant Pacific Investment Management Co., known as PIMCO, agreed to pay $92 million to settle a lawsuit accusing the Newport Beach firm of trying to corner part of the market for Treasury bonds in 2005.  The class action challenged trades by PIMCO in futures tied to the price of 10-year Treasury notes.

The plaintiffs, including Chicago investment firm Breakwater Trading, had taken “short” positions in the futures contracts, agreeing to supply T-notes to PIMCO when the contracts expired.

Breakwater and the other plaintiffs were betting that the market value of the notes would decline. But when the contracts ran out, according to the suit, the plaintiffs paid artificially high prices because PIMCO had manipulated the market by buying up a large amount of the notes.  PIMCO denied any misconduct in the trades and reiterated that position in a statement announcing the settlement, which requires court approval.

Ruling in 2007 that the case could proceed as a class action, U.S. District Judge Ronald Guzman in Chicago wrote that “considering the totality of the circumstances, it can be reasonably inferred from the facts alleged that PIMCO Funds intended to cause artificial prices or otherwise manipulate the futures market.”  The investment firm unsuccessfully appealed Guzman’s ruling to the federal appeals court and then to the U.S. Supreme Court, which last February let the ruling stand.

Pimco said it would pay the $92-million settlement itself and not pass the cost on to the mutual funds it manages or to other clients.