Initial Decision of an SEC Administrative Law Judge

In the Matter of
Piper Capital Management, Inc., et al.

INITIAL DECISION RELEASE NO. 175
ADMINISTRATIVE PROCEEDING
FILE NO. 3-9657

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, DC

In the Matter of PIPER CAPITAL MANAGEMENT, INC. WORTH V. BRUNTJEN MARIJO A. GOLDSTEIN ROBERT H. NELSON AMY K. JOHNSON MOLLY DESTRO and EDWARD J. KOHLER

: : : : : : : : :

INITIAL DECISION November 30, 2000

APPEARANCES:

Gregory P. von Schaumburg, Michael J. Diver, Randall J. Fons and Thomas W. Szromba for the Division of Enforcement, Securities and Exchange Commission

George F. McGunnigle, Lawrence J. Field, Todd A. Noteboom and Barbara P. Berens for Respondent Piper Capital Management, Inc.

Phillip M. Goldberg and Todd A. Strother for Respondent Marijo A. Goldstein

Robert J. Hennessey for Respondent Robert H. Nelson

Stephen P. Bedell and Michael T. Foley for Respondent Amy K. Johnson

Jodeen A. Kozlak for Respondent Molly Destro

David P. Pearson and Laura A. Pfeiffer for Respondent Edward J. Kohler

Carmine D. Boccuzzi for the Witness David J. Barrett

Howard J. Stein for the Witness Worth Bruntjen

Guy Petrillo for the Witness M. Kathleen Wood

Beth E. Carlson for the Witness Beverly Zimmer

Thomas B. Hatch for the Witness Kevin L. Smith

BEFORE:

H. Peter Young, Administrative Law Judge

TABLE OF CONTENTS

1. INTRODUCTION

   1. BACKGROUND

   2. RESPONDENTS

   3. ALLEGATIONS (IN SUMMARY)

   4. PROCEDURAL HISTORY

2. ISSUE ANALYSES

   1. Possible Violations of Section 17(a) of the Securities Act Based on Inadequate Risk Disclosure

      1. Party Positions
         
      2. Findings of Fact/Conclusions of Law

   2. Possible Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Based on Inadequate Risk Disclosure

   3. Possible Violations of Section 13(a)(3) of the Investment Company Act Based on Inadequate Risk Disclosure

      1. Party Positions
         
      2. Findings of Fact/Conclusions of Law

   4. Possible Violations of Section 17(a) of the Securities Act Based on Weekly Pricing in Calculating the Fund's NAV

      1. Party Positions
         
      2. Findings of Fact/Conclusions of Law

   5. Possible Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Based on Weekly Pricing in Calculating the Fund's NAV

   6. Possible Violations of Section 17(a) of the Securities Act Based on Manipulation of the Fund's NAV

      1. Party Positions
         
      2. Findings of Fact/Conclusions of Law

   7. Possible Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Based on Manipulation of the Fund's NAV

   8. Possible Violation of Rule 22c-1, Promulgated Pursuant to Section 22(c) of the Investment Company Act, Based on Manipulation of the Fund's NAV

   9. Possible Violation of Section 31(a) of the Investment Company Act and Rule 31a-1 Thereunder Based on Improper Books and Records

   10. Possible Violation of Section 34(b) of the Investment Company Act Based on False Statements Concerning Risks of Fund and Calculation of Net Asset Value Contained in Registration Statements, Applications and Other Required Records

   11. Possible Violation of Section 34(b) of the Investment Company Act Based on False Statements Concerning Source of Prices Used in Calculation of Net Asset Value Contained in Registration Statements, Applications and Other Required Records

   12. Possible Violation of Section 207 [of the Investment Advisers Act] Based on False Statements Concerning Education Background of Respondent Bruntjen

   13. Possible Failure Reasonably to Supervise

       1. Party Positions
          
       2. Findings of Fact/Conclusions of Law

3. SANCTIONS

4. MATTERS NOT DISCUSSED

5. RECORD CERTIFICATION

6. ORDER

I. INTRODUCTION

Securities and Exchange Commission, Division of Enforcement ("Division") has characterized this proceeding as one of the largest and most complex it has ever conducted. It involves numerous Respondents, each of which is charged with multiple securities laws violations. It subsumes myriad factual issues, many of which are esoteric- even within the securities industry. The complexity- hence, the difficulty- of the issues presented is compounded by an unprecedented confluence of events which, in itself, had a significant adverse impact on an entire segment of the industry.

A. BACKGROUND:

1. The Fund

Piper Jaffray Institutional Government Income Portfolio ("PJIGX" or the "Fund") was a diversified mutual fund first offered to investors in 1988. Exh. PCM-12 at p. PCM-00118. The Fund was registered as an open-end management investment company which sold and redeemed shares directly to and from investors.¹

From inception, the Fund portfolio was comprised principally of mortgage-backed securities. These securities initially were relatively simple instruments, representing undivided pass-through interests in mortgage "pools" assembled by agencies such as the Federal National Mortgage Association (Fannie Mae) and the Government National Mortgage Association (Ginnie Mae). Most such securities guarantee returns of principal and interest to investors, rendering them comparatively safe investments.

Over time, a market for new types of mortgage-backed securities emerged and developed.

One category of new security which developed was the collateralized mortgage obligation ("CMO"). CMOs are financial instruments collateralized by income streams anticipated from payments to underlying pass-through securities or mortgage loan pools. CMOs assign and distribute payments from the underlying obligations among different classes or "tranches" of bonds with various maturities and expected cash flow characteristics. Relatively complex financial products may be-- and soon were- derived from the basic CMO paradigm. Such "derivative" securities more precisely defined and allocated various risks associated with underlying mortgage collateral.² For example, interest only ("IO") derivative securities created a right to receive only the interest component of a mortgage pool income stream, while principal only ("PO") derivative securities created a similar right to receive only the principal component. More exotic CMO derivative securities established rights to receive revenues which: (1) varied inversely to a specific interest rate index ("Inverse Floater"); (2) varied inversely to a specific interest rate index, but paid only an interest component ("Inverse IO"); or (3) accrued to the security balance until some future event triggered amortized payments ("Z-Bond"). Because these derivative structures in themselves did not eliminate prepayment risk, however, they were further segregated into planned amortization class ("PAC") bonds and support bonds, the former of which achieved relative prepayment stability by allocating disproportionate prepayment uncertainty to the latter.

PJIGX began to shift its portfolio composition from simple pass-through securities to CMO derivative securities late in 1991. By March 1993, an overwhelming proportion of the Fund's net assets was invested in CMO derivative securities. PJIGX leveraged these investments, enabling it to make significant additional CMO derivative investments. The Fund's investment strategy produced superior returns from late 1991 through early 1994.

2. Fund Valuation/Share Pricing

Securities like common stocks and bonds are traded on public exchanges. Potential buyers and sellers are able to determine reasonable values for these securities with relative ease because prices are fixed by actual market transactions. A publicly-traded security's reasonable value may be determined at any point in time by reference to its most recent market price. For example, the reasonable value of a publicly-traded security at the end of any trading day would be the security's closing price on that day.

In contrast, CMOs are traded only in broker-dealer markets. These markets rely on trader estimates of security prices to value the securities. To a significant degree, CMO valuation and pricing rely on trader expertise and familiarity with market information, conditions and developments. It follows that the reasonable value of a CMO- while determined in accordance with objective information and criteria-- cannot be fixed as precisely as the reasonable value of a publicly-traded security.

The total net value of a mutual fund comprised of CMO securities is the composite estimated value of all CMOs held by the fund. Dividing this composite estimated value by the total number of outstanding shares yields the fund's individual share price, or net asset value ("NAV"). A fund's published NAV is the valuation information on which potential buyers and sellers must rely.³

PJIGX calculated its NAV on a daily basis. The process involved obtaining individual security prices from various sources, including a professional pricing service, individual bond traders, and "fair valuation"-- a documented pricing procedure of last resort which relies on alternate price quotations/sophisticated financial analytic software⁴ to extrapolate security values from values assigned to comparable securities. PJIGX frequently cross-checked these sources to ensure accuracy.

Each business day, PJIGX's security pricing service, Kenny S&P Evaluation Service (and its affiliate, EJV Partners) (collectively, "Kenny"), compiled and transmitted pricing information to the Fund's accounting agent, Investors Fiduciary Trust Fund ("IFTC").⁵ IFTC processed the information, then transmitted initial pricing reports to PJIGX. These reports reflected prices for each of the Fund's individual securities, as well as an interim NAV calculation based on those prices. IFTC also transmitted a daily "stratification report" highlighting securities with significant price changes or missing prices. PJIGX worked directly with Kenny to correct suspected pricing errors and to obtain missing security prices. IFTC finalized its initial daily reports only after PJIGX approved an NAV based on its review and confirmation of all Fund security prices. The Fund-approved NAV was then reported to NASDAQ for publication.

3. Financial Market Climate and Circumstances

Interest rates affecting the CMO market declined from late 1991 through early 1994. Although this decline was steady throughout the period, it produced little volatility in the market. And since most CMO values vary inversely to underlying interest rates, CMO security values generally increased during the period. Early in 1994, however, the Federal Reserve Board initiated a series of interest rate increases. These increases had a negative impact on CMO values. CMO securities, and the funds holding them, suffered significant losses. The losses caused concomitant sell-offs, depressing values even further as CMO securities flooded the market. The situation turned critical when Askin Capital Management, Inc. ("Askin"), a large hedge fund manager, was unable to satisfy broker-dealer margin calls beginning on March 30, 1994. As a consequence, broker-dealers liquidated several hundred million dollars in CMOs from Askin's funds, precipitating extreme price volatility and what generally is regarded as a "crash" in the CMO securities market.

PJIGX lost approximately $300 million in the crash.

4. Impact on Fund Valuation/Share Pricing

The previously described CMO market saturation and volatility complicated PJIGX's valuation process. Lack of liquidity combined with interest rate-driven reductions in value to depress dealer estimates of CMO market prices. In addition, dealer attention to rapidly changing market circumstances occupied time which otherwise could have been dedicated to security pricing for entities like Kenney and PJIGX. The material result was a tenfold increase in the number of securities appearing on IFTC's daily stratification reports to PJIGX,⁶ all of which had to be cross-checked by the Fund before its daily NAV could be approved for publication. This increase severely challenged PJIGX's ability to establish an accurate daily NAV for the Fund from March 31, 1994 to April 8, 1994. Throughout that period, what customarily had been a routine half-hour procedure turned hectic, consuming most of each business day. Dealer marks were difficult to secure, and varied widely from dealer to dealer/day to day. As a consequence, PJIGX was compelled to select among significantly different marks for the same securities or to assign security prices based on internal efforts at fair valuation. The Fund's valuation difficulties were compounded by PJIGX's March 31, 1994 discovery that numerous individual security prices being provided by Kenney on a daily basis had not been adjusted for an indeterminate period of time, rendering them "stale" and inaccurate.

B. RESPONDENTS:

1. Piper Capital Management Incorporated ("PCM" or the "Company")

PCM is a wholly-owned subsidiary of Piper Jaffray Companies, Inc., and is located in Minneapolis, Minnesota. PCM has been registered as an investment adviser with the Commission since 1983. PCM acted as the Fund's investment adviser and managed the Fund's daily operations.⁷ PCM also acted as investment adviser to ten other funds associated with Piper Funds, Inc. At its peak, PCM managed assets totaling more than $13 billion.

2. Worth V. Bruntjen ("Bruntjen")

Bruntjen was a Senior Vice-President at PCM from January 1988 until he resigned on January 1, 1998. He was the Fund portfolio manager from its inception in 1988 until his resignation. Bruntjen had primary responsibility for the day-to-day management of the Fund portfolio. He also had primary responsibility for the day-to-day management of four other funds for Piper Funds, Inc.⁸

3. Marijo A. Goldstein ("Goldstein")

Goldstein was a Vice-President at PCM from November 1991 to November 1993, and a Senior Vice-President from November 1993 to 1995. She was the Fund portfolio "co-manager" from January 1990 through June 1994. Goldstein worked under Bruntjen's direct supervision in her capacity as Fund portfolio co-manager. Goldstein currently is Director of Fixed Income Research at First American Asset Management.

4. Robert H. Nelson ("Nelson")

Nelson was a Vice-President at PCM from 1991 to November 1993, and a Senior Vice President from November 1993 until U.S. Bancorp, Inc. acquired PCM's parent company. Nelson managed PCM's Mutual Fund Accounting Department from November 1993 through December 1997. As Manager of the PCM Mutual Fund Accounting Department, Nelson exercised direct authority and supervision over Respondents Amy K. Johnson and Molly Destro. Nelson currently is Manager of Investment Client Services at First American Asset Management.

5. Amy K. Johnson ("Johnson")

Johnson is a certified public accountant. She joined PCM as Operations Coordinator in November 1992. PCM promoted her to Accounting Administrator in April 1993, and to Accounting Manager a few months later. Johnson had primary accounting responsibility for PJIGX, as well as for nineteen other PCM funds. PCM promoted her to Vice-President in November 1994. At the time of hearing, Johnson was on family leave from her current position at First American Asset Management.

6. Molly Destro ("Destro")

Destro joined PCM as a mutual fund accountant in May 1991. PCM promoted her to Accounting Manager in late 1992 or early 1993, and to Vice-President in November 1994. Destro had accounting and securities pricing responsibilities for various PCM mutual funds, including PJIGX. At the time of hearing, Destro was not employed in the securities industry.

7. Edward J. Kohler ("Kohler")

Kohler was President and Chief Executive Officer ("CEO") of PCM from August 1985 until PCM terminated his employment in November 1994. He was Bruntjen's direct supervisor. As PCM President and CEO, he also had supervisory authority over PCM, the Fund and each of the other individual Respondents. Kohler has been unemployed since the spring of 1998.

C. ALLEGATIONS (IN SUMMARY):

1. Against PCM

PCM, through Bruntjen and Goldstein, failed to state/misstated material facts to investors from January 1991 through April 1994. PCM misrepresented the risks associated with investment in the Fund through inaccurate or misleading filings, prospectuses, marketing materials and other communications. PCM marketed the Fund as a conservative investment when, in fact, the Fund exposed investors to significant risks by disproportionately investing in interest rate-sensitive CMO derivative securities. PCM changed the Fund's stated investment objective without proper authority.

PCM, through Bruntjen, Goldstein, Nelson, Johnson and Destro: (1) misrepresented the Fund's NAV to shareholders and to the public; (2) improperly calculated the Fund's NAV on a weekly basis from October 1993 to March 31, 1994; (3) purposefully manipulated the Fund's NAV from March 31, 1994 through April 8, 1994.

2. Against Bruntjen

Moot, except as indicated in Sections (I) (C) (1), supra, and (I) (C) (3), infra.

3. Against Goldstein

Goldstein, as Fund portfolio co-manager with Bruntjen, bears equal responsibility to Bruntjen. She failed to state/misstated material facts to investors from January 1991 through April 1994. She misrepresented risks associated with investment in the Fund through inaccurate or misleading filings, prospectuses, marketing materials and other communications. She marketed the Fund as a conservative investment when, in fact, the Fund exposed investors to significant risks by disproportionately investing in interest rate-sensitive CMO derivative securities. She changed the Fund's stated investment objective without proper authority. She misrepresented the Fund's NAV to shareholders and to the public. She purposefully manipulated the Fund's NAV from March 31, 1994 through April 8, 1994.

4. Against Nelson

Nelson, as Manager of the PCM Mutual Fund Accounting Department, purposefully conspired to misrepresent the Fund's NAV to shareholders and to the public. He purposefully conspired to manipulate the Fund's NAV from March 31, 1994 through April 8, 1994.

5. Against Johnson

Johnson, as Accounting Manager for the Fund, purposefully conspired to misrepresent the Fund's NAV to shareholders and to the public. She purposefully conspired to manipulate the Fund's NAV from March 31, 1994 through April 8, 1994.

6. Against Destro

Destro, as Accounting Manager for the Fund, purposefully conspired to misrepresent the Fund's NAV to shareholders and to the public. She purposefully conspired to manipulate the Fund's NAV from March 31, 1994 through April 8, 1994.

7. Against Kohler

Kohler, as PCM President and CEO, failed to ensure that PCM had established reasonable supervisory systems to prevent securities laws violations. Kohler, as Bruntjen's direct supervisor, failed to supervise Fund portfolio co-managers Bruntjen and Goldstein in a reasonable manner.

D. PROCEDURAL HISTORY:

1. Prior Related Proceedings

A civil class action lawsuit was instituted against PCM by Fund shareholders on May 9, 1994.⁹ Exh. PCM-398. PCM agreed to settle the class action by paying participating shareholders¹⁰ a total of up to $70 million. Exh. PCM-426 at pp. PCM-06181-82. The court approved the settlement-- which recouped less than fifty cents on the dollar¹¹ for most Fund investors-- as "fair, reasonable, adequate and in the best interests of the Settlement Class." Exh. PCM-440 at p. PCM-06461.

National Association of Securities Dealers, Inc. ("NASD") and various state regulators initiated investigations concerning PCM and the Fund in 1995 and 1996. These investigations were resolved through consent agreements with NASD (2/96), the State of Minnesota (2/96), the State of South Dakota (7/96), the State of Montana (10/96), the State of North Dakota (2/97) and the State of Maryland (date not specified), which imposed fines, penalties and other non-monetary sanctions.

Exh. PCM-63 at p. PCM-01224.1; Exh. PCM-441; Exh. PCM-442; Exh. PCM-443; Exh. PCM-448; Exh. PCM-450; Exh. PCM-980.

2. The Instant Action

This proceeding was initiated by a July 28, 1998 Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934, Sections 9 (b) and 9 (f) of the Investment Company Act of 1940 and Sections 203 (e) and 203 (k) of the Investment Advisers Act of 1940 (the "OIP"). Exh. PCM-1. The OIP was preceded by more than four years of exhaustive Division investigation. In the course of that investigation, Division compiled more than one million pages of documentary evidence and conducted over thirty-seven days of on-record interviews. Division also conducted an indeterminate number of off-record interviews.

The hearing was conducted over an eight week period from February 16, 1999 through April 6, 1999 in Minneapolis, Minnesota. In addition to Respondents, more than forty expert and lay witnesses provided testimony. Over one thousand exhibits were received into evidence; approximately three hundred other exhibits were marked for identification, but not admitted into evidence. The hearing transcript ("Tr.") totals four thousand nine hundred sixty-nine pages.

Division concluded presentation of its case-in-chief against Respondents on March 24, 1999. Goldstein, Nelson, Johnson, Destro and Kohler made oral motions for summary disposition at that stage of the proceeding. In deference to the parties' unanimous preference not to adjourn the hearing to accommodate immediate briefing/disposition of the motions for summary disposition, the motions were held in abeyance pursuant to 17 C.F.R. § 201.205 (b) until the hearing was completed. Just prior to hearing completion, PCM indicated it intended to seek partial summary disposition of the case against the Company.

Respondents filed written motions for summary disposition and supporting memoranda on April 16, 1999. Division filed a comprehensive opposition/supporting memorandum to the motions on April 26, 1999. Respondents filed reply memoranda on April 29, 1999. By order issued May 21, 1999, the presiding judge determined, inter alia, that no Respondent had demonstrated it was entitled to summary disposition of any charge against it.

The record closed on May 18, 1999. In consideration of the magnitude and complexity of the issues involved in this proceeding, the parties were granted more briefing time than customarily would have been appropriate. Initial briefs ("IB") were filed on July 20, 1999. Reply briefs ("RB") were filed on September 20, 1999.

Robert R. Weinstine, Esq. subsequently submitted a two page letter dated September 11, 2000 to the presiding judge on behalf of Respondent Kohler. The presiding judge directed counsel of record for Respondent Kohler to ensure that the September 11, 2000 letter was filed with the Commission and served on all parties in accordance with the Commission's Rules of Practice by order dated September 13, 2000. Division submitted a Motion to Strike the September 11th Brief of Respondent Edward Kohler on September 19, 2000, alternately requesting leave to file a response. Division's request for leave to respond to the September 11, 2000 letter was granted by order dated September 21, 2000. Division filed its response to the September 11, 2000 letter on September 29, 2000.

II. ISSUE ANALYSES

A. Possible Violations of Section 17(a) of the Securities Act Based on Inadequate Risk Disclosure

OIP Paragraphs K through S allege that PCM, through Bruntjen and Goldstein, violated the antifraud provisions¹² of the federal securities laws by misstating/failing to state material facts concerning risks associated with investment in the Fund. One of these provisions is contained in Section 17(a) of the Securities Act of 1933, which makes it unlawful to employ any device, scheme, or artifice to defraud in the offer or sale of any securities. See 15 U.S.C. § 77q (a)(1).

1. Party Positions

(a) Division

Division maintains that PCM and Goldstein violated Section 17(a) by: (1) converting PJIGX from a conservative fixed-income investment to a highly-leveraged/significantly more interest rate-sensitive investment; (2) failing adequately to disclose the Fund's increased risk characteristics in Fund reports, summaries and prospectuses; and (3) continuing to market PJIGX as a conservative investment without materially amending its risk disclosures, marketing materials or sales presentations.

Division underscores the fact that the Fund's assets initially were invested almost exclusively in U.S. Treasury notes and ordinary government agency securities. Division also emphasizes that PJIGX's initial stated investment objective was "a high level of current income consistent with the preservation of capital," and that the Fund's stated investment objective never changed. Division juxtaposes PJIGX's static investment statement with the dynamic change in Fund portfolio composition over time. Division stresses that the Fund increasingly invested in interest rate-sensitive CMO derivative securities from late 1991 through early 1994, eventually constituting what Division characterizes as a "one way bet on interest rates."

Division asserts that PJIGX's returns and reputation skyrocketed in 1992 and 1993 due to the increasing proportions of CMO derivative securities it held. As a consequence, the Fund attracted millions of dollars in additional investments, breaking sales record after sales record in the process. The undisclosed downside to this success, Division claims, was a portfolio sensitivity to interest rates that was well beyond what Fund prospectuses and sales literature suggested, and far in excess of peer fund sensitivities. Division contends that by March 1993 PJIGX's aggressive CMO derivative investment strategy, coupled with its asset leveraging practices, had inflated overall Fund portfolio duration¹³ to more than three times the figure disclosed to investors. Division maintains that the Fund portfolio's extended duration was structured to benefit from stable or declining interest rates, but was susceptible to disproportionate losses if interest rates rose. This susceptibility allegedly was exacerbated by the undisclosed fact that the portfolio also exhibited extreme negative convexity.¹⁴ According to Division, the Fund's undisclosed duration, convexity and leverage would have produced massive losses as early as March 1993 if interest rates had risen at that time. Division therefore discounts any PCM/Goldstein focus on the extraordinary market events which occurred in early 1994.

Division contrasts the Fund's composition and investment strategy with its disclosure/ marketing materials and strategy. In addition to PCM's failure to revise the Fund's stated investment objective as its portfolio composition changed, Division emphasizes that PCM initially marketed PJIGX as a money market alternative with an AAAf Standard & Poor rating and a volatility comparable to the three year treasury market. Division also underscores the fact that the Fund expressly eschewed "options, futures or so called 'derivative instruments'" in its early shareholder reports and marketing materials. Division contends that PCM continued to market PJIGX as a low risk alternative to treasury securities despite a substantial portfolio shift to high risk CMO derivative securities. Moreover, Division maintains that PCM, Bruntjen and Goldstein consistently told investors and sales representatives that PJIGX's composite duration reflected minimal to moderate volatility when, in fact, Fund duration knowingly or recklessly had been based on an "indicated duration" calculus which substantially understated the portfolio's actual volatility.

(b) PCM

PCM interposes statute of limitations, good faith and industry standards as threshold affirmative defenses to any alleged violation of Section 17(a). The Company also emphasizes that Section 17(a) requires Division to prove: (1) a material omission/misrepresentation of fact; (2) made in connection with the offer or sale of a security; and (3) demonstrating intent to deceive or defraud. PCM stresses that neither reckless nor intentional misrepresentation is actionable under Section 17 (a) unless proven to be material to investors, arguing that materiality has not been proven. In addition, PCM maintains that Division has failed to prove the Company acted with the scienter required to establish a Section 17(a) violation.

PCM disputes Division's claim that PJIGX was converted to a materially riskier/more volatile investment vehicle through undisclosed changes in portfolio composition, duration, convexity and leverage. PCM emphasizes that PJIGX portfolio composition was disclosed through comprehensive listings of all securities held by the Fund. The Company also maintains that Fund duration disclosures were accurate, and this accuracy is confirmed by post hoc analyses of actual Fund NAV responses to interest rate changes. In addition, PCM asserts it was not required to disclose PJIGX portfolio convexity. PCM argues, moreover, that Division misconstrues disclosures relating to portfolio diversification and balance, and that the SEC reviewed and specifically approved PJIGX's portfolio diversification methodology in the context of a February 1994 examination. Finally, the Company points out that Fund sale when-issued/dollar roll program disclosures were at all times at least industry standard.

(c) Goldstein

Goldstein also interposes statute of limitations, industry standards and good faith as threshold affirmative defenses to any alleged violation of Section 17(a). In addition, she echoes PCM's positions concerning the adequacy of Fund composition, duration, convexity and leverage disclosures. Goldstein supplements these defenses with the argument that she cannot be held primarily liable for the disclosures at issue because she did not participate to any substantial degree in formulating or making them. Goldstein claims she was a Fund "co-manager" in title only, and Bruntjen alone formulated PJIGX's investment strategy, as well as any disclosures or other representations related to that strategy. Moreover, Goldstein claims Division has not established that she personally misrepresented the Fund in the context of broker or client sales presentations.

2. Findings of Fact/Conclusions of Law

(a) Findings of Fact

PJIGX was a diversified mutual fund first offered to investors in 1988. Exh. PCM-12 at p. PCM-00118. The Fund's initial stated investment objective was "a high level of current income consistent with preservation of capital." Id. at p. PCM-00122. The Fund's stated investment objective could not be changed without shareholder approval and, in fact, was not changed over the life of the Fund. Compare Exh. PCM-12 at p. PCM-00122 (June 20, 1988 Prospectus) with Exh. PCM-23 at p. PCM-00301 (February 1, 1994 Prospectus).

The PJIGX portfolio initially was comprised almost exclusively of ordinary mortgage-backed securities. Exh. PCM-40 at p. PCM-00658; Exh. PCM-41 at p. PCM-00673. These securities represented undivided pass-through interests in mortgage pools assembled and guaranteed as to payment of principal and interest by various federal agencies. Exh. PCM-12 at pp. PCM-00122-23. The guaranteeing agencies included the Federal National Mortgage Association, the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation. Id. at p. PCM-00123. The relative safety of investments in these agencies' securities was reflected in the Fund's stated investment objective, as well as in its stated Investment Policies and Techniques. Exh. PCM-12 at p. PCM-00122.

PCM initially presented PJIGX as a money market alternative with volatility comparable to the three year treasury market, attributing the Fund's AAAf Standard & Poor rating to the "high quality" of its portfolio securities. Exh. PCM-40 at p. PCM-00649; Exh. PCM-41 at p. PCM-00667. PCM also expressly attributed PJIGX's Standard and Poor rating/performance to the fact that the Fund "will invest only in Government securities and will not commit funds to options, futures or so called 'derivative instruments'" in its initial shareholder reports and marketing materials. Exh. PCM-40 at p. PCM-00649. These materials attributed Fund yield in excess of comparably volatile money market securities to "active management of the portfolio within the context of [the Company's] interest rate outlook . . . ." Id.

PJIGX prospectuses systematically and uniformly emphasized the relatively conservative composition of the Fund portfolio. Exh. PCM-12 at p. PCM-00122 (6/88); Exh. PCM-14 at pp. PCM-00144-45 (1/90); Exh. PCM-16 at pp. PCM-00166-67 (1/91); Exh. PCM-17 at pp. PCM-00187-88 (9/91 supp.); Exh. PCM-18 at pp. PCM-00208-09 (1/92); Exh. PCM-20 at pp.PCM-00231-32 (5/92 supp.); Exh. PCM-21 at p. PCM-00253 (1/93); Exh. PCM-22 at p. PCM-00275 (3/93); Exh. PCM-23 at p. PCM-00301 (2/94); Exh. PCM-24 at p.PCM- 00325 (4/94 supp.); Exh. PCM-25 at p. PCM-00349 (5/94 supp.). PJIGX prospectuses systematically and uniformly emphasized a strategy of seeking high current income while preserving principal investment by maintaining a portfolio security average weighted life of approximately three to five years. Id. PJIGX semi-annual and annual reports to shareholders systematically and uniformly emphasized the same strategy, as well as both the quality of the Fund portfolio and its superior performance. Exh. PCM-40 at p. PCM-00649 (10/88); Exh. PCM-41 at p. PCM-00667 (3/89); Exh. PCM-42 at pp. PCM-00677, PCM-00679-80 (9/89); Exh. PCM-43 at pp. PCM-00689, PCM-00690 (3/90); Exh. PCM-44 at pp.PCM-00699-701 (9/90); Exh. PCM-45 at pp. PCM-00710-11 (3/91); Exh. PCM-46 at pp. PCM-00720-22 (1991); Exh. PCM-47 at pp. PCM-00731-34 (1992); Exh. PCM-48 at pp. PCM-007143-45 (1992); Exh. PCM-49 at pp. PCM-00755-57 (1993); Exh. PCM-50 at pp. PCM-00767, PCM-00769-70 (1993).

PJIGX began to shift its portfolio composition from simple pass-through securities to CMO derivative securities late in 1991. Tr. 3155-56. By March 1993, PCM had invested somewhere between 93.1 % (Exh. PCM-49 at pp. PCM-00762-64) and 97.5% (Exh. DIV-229 at pp. DIV-09332-33) of the Fund's net assets in CMO derivative securities. By March 1993, the Company also had leveraged the Fund's total CMO derivative investments to as much as 149% of net assets by implementing a "sale/when-issued" (aka "dollar roll") program.¹⁵ Exh. PCM-49 at p. PCM-00760; Exh. DIV-229 at p. DIV-09332. These investment strategies produced superior returns. For the fiscal year ended September 30, 1993, the Fund was ranked first among 65 short-term U.S. Government funds by Lipper Analytical Services, and first among 27 in the same category over the five year period ended September 30, 1993. Exh. PCM-50 at p. PCM-00769; Exh. PCM-289 at p. PCM-03762. This performance attracted massive investment: PJIGX's net assets swelled by over $500 million between January 1992 and September 1993. Exh. PCM-289 at p. PCM-03764. The Fund broke multiple sales records with respect to investor funds collected over the same period. Exh. DIV-236 at p. 44.

The Fund's 1991 Annual Report expressly noted that PJIGX introduced CMOs into the Fund portfolio early in the fiscal year. Exh. PCM-46 at p. PCM-00721. The fact that CMOs comprised part of the Fund portfolio was mentioned or otherwise reflected¹⁶ in every subsequent annual/semi-annual report to shareholders. Exh. PCM-47 at pp. PCM-00734, PCM-00738; Exh. PCM-48 at p. PCM-00744; Exh. PCM-49 at p. PCM-00756; Exh. PCM-50 at p. PCM-00767. The fact that CMO derivative securities were essential to the Fund's superior performance was specifically noted for the first time in the Fund's 1994 semi-annual report to shareholders. Exh. PCM-51 at p. PCM-00788. That report addressed a significant decline in Fund performance, which the report attributed to sharp interest rate increases, extended portfolio security maturities and increased volatility in the CMO derivative securities market. Id. at pp. PCM-00788-90.

Interest rates affecting the CMO market steadily declined between late 1991 and early 1994. Exh. PCM-46 at p. PCM-00722; Exh. PCM-48 at p. PCM-00745; Exh. PCM-50 at p. PCM-00769; Exh. PCM-63 at p. PCM-01174; Exh. DIV-229 at p. DIV-09313. Since CMO values generally vary inversely to underlying interest rates, CMOs generally increased in value from late 1991 through the end of 1993. Exh. PCM-63 at pp. PCM-01170, PCM-01172. The Federal Reserve Board initiated a series of interest rate increases early in 1994, however, and these increases had a severe negative impact on CMO values. Exh. PCM-63 at pp. PCM-01172-75; Exh. DIV-229 at p. DIV-09346; Tr. 2645. CMOs and the funds holding them suffered significant losses. Id. These losses triggered additional sell-offs, depressing values even further as CMO securities flooded the market. Exh. PCM-100; Exh. PCM-558 at p. PCM-13135. The CMO market effectively crashed when Askin was unable to satisfy broker-dealer margin calls beginning on March 30, 1994, and several hundred million dollars in Askin fund CMOs were liquidated in an already saturated market. Exh. PCM-63 at p. PCM-01174; Exh. PCM-100; Exh. PCM-743 at pp. PCM-14974-94; Exh. DIV-229 at pp. DIV-09314, DIV-09346. It is undisputed that this confluence of events precipitated the significant Fund losses which ultimately resulted in Division's Section 17(a) allegations against PCM. Division and PCM fundamentally disagree, however, with respect to materiality. PCM maintains that PJIGX's risk disclosures were accurate and adequate, emphasizing that the Fund's losses resulted from market circumstances which PCM reasonably could not have anticipated and over which it had no control. Division essentially argues that market circumstances are immaterial to the Section 17(a) allegations against PCM, focusing instead on allegedly undisclosed/inadequately disclosed changes to the Fund's investment strategy, composition, duration, convexity and leverage.

(b) Threshold Conclusions of Law

The legal standard to establish a violation of Section 17(a)(1) is: (1) misrepresentation or omission of material fact; (2) made in connection with the offer, sale or purchase of securities; (3) demonstrating either intent to deceive/defraud or recklessness.¹⁷ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Aaron v. SEC, 446 U.S. 680, 697 (1980). A fact is material if there is a substantial likelihood that a reasonable investor would consider the fact important in making an investment decision and would view the information as having significantly altered the total mix of available information. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). "Recklessness" consists of highly unreasonable conduct constituting an extreme departure from standards of ordinary care. See, e.g., Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023-25 (6th Cir. 1979).

PCM raises a statute of limitations defense to Division's Section 17(a) allegations insofar as the allegations concern conduct or written materials which pre-date the OIP by more than five (5) years.¹⁸ Exh. PCM-2 at p. PCM-00032 (¶ 43). PCM cites the five (5) year limitation reflected in 28 U.S.C. § 2462 as the applicable standard, contending that any conduct occurring prior to July 28, 1993 is not sanctionable under Section 17(a) and therefore may not be considered in this proceeding.

28 U.S.C. § 2462 clearly establishes the applicable statute of limitations for imposing sanctions/penalties pursuant to Section 17(a).¹⁹ It follows that Division may not seek sanctions or penalties against PCM for any alleged violation of Section 17(a) which pre-dates the OIP by more than five (5) years- i.e. prior to July 28, 1993. It does not follow, however, that evidence concerning PCM's conduct prior to July 28, 1993 must be ignored. Inter alia, Division seeks cease & desist orders for PCM conduct which occurred in 1991, 1992 and throughout 1993. Cease & desist orders do not constitute "penalties" within the meaning of 28 U.S.C. § 2462. See, e.g., Joseph J. Barbato, Admin. Proc. 3-8575 at *41 and n.25 (Feb. 10, 1999). More important, a statute of limitations does not constitute an evidentiary bar. Id. at * 42 and n.26 (citing United States v. Gavin, 565 F.2d 519, 523 (8th Cir. 1977)). Accord Alfred M. Bauer and J. Stephen Stout, Admin. Proc. 3-9034 at *5-6 (Jan. 7, 1999). Principal among Division's allegations against PCM is a systematic undisclosed/ inadequately disclosed shift in PJIGX portfolio composition and risk characteristics between late 1991 and early 1994. Whether PCM violated Section 17(a) at any time- including the post-July 28, 1993 period which indisputably is not subject to the statute of limitations-- necessarily depends on comparisons between Fund composition/risk characteristics and disclosures throughout the period at issue.²⁰ Moreover, such comparisons are as fundamental to PCM's affirmative claims of good faith and compliance with industry standards as they are to Division's claims to the contrary, burden of proof notwithstanding. I find and conclude that while any claim for penalties/sanctions pursuant to Section 17(a) is time barred insofar as it concerns conduct occurring prior to July 28, 1993, PCM conduct and written materials pre-dating July 28, 1993 nevertheless may be considered as evidence in this proceeding.²¹

I also find and conclude that neither the Federal Reserve Board's interest rate increases nor the CMO market volatility described supra is material to Division's Section 17(a) allegations against PCM. Fund losses are not directly at issue here-- or anywhere else in this proceeding. The immediate issue is whether PJIGX prospectuses, reports, summaries, marketing materials and sales presentations accurately/adequately reflected the Fund's investment strategy, composition, duration, convexity and leverage. Division contends that they did not. Division therefore must substantiate its contention by a preponderance of the evidence. See, e.g., Steadman v. SEC, 603 F.2d 1126, 1137 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981).

(c) Substantive Analysis and Determinations

1. Fund Composition and Stated Investment Objective

The record establishes that PJIGX's portfolio initially was comprised almost exclusively of ordinary mortgage-backed securities representing undivided pass-through interests in mortgage pools. Exh. PCM-12 at pp. PCM-00122-23; Exh. PCM-40 at p. PCM-00658; Exh. PCM-41 at p. PCM-00673. The record confirms that these securities were relatively safe investments because they were guaranteed as to payment of principal and interest by federal agencies such as the Federal National Mortgage Association, the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation. Id. The record also confirms that PCM initially presented PJIGX as a money market alternative with volatility comparable to the three year treasury market, attributing the Fund's performance and AAAf Standard & Poor rating to the "high quality" of the portfolio's securities and the fact that the Fund "will invest only in Government securities and will not commit funds to options, futures or so called 'derivative instruments.'" Exh. PCM-40 at p. PCM-00649; Exh. PCM-41 at p. PCM-00667.

PJIGX prospectuses systematically and uniformly emphasized the relatively conservative composition of the Fund portfolio. Exh. PCM-12 at p. PCM-00122 (6/88); Exh. PCM-14 at pp. PCM-00144-45 (1/90); Exh. PCM-16 at pp. PCM-00166-67 (1/91); Exh. PCM-17 at pp. PCM-00187-88 (9/91 supp.); Exh. PCM-18 at pp. PCM-00208-09 (1/92); Exh. PCM-20 at pp.PCM-00231-32 (5/92 supp.); Exh. PCM-21 at p. PCM-00253 (1/93); Exh. PCM-22 at p. PCM-00275 (3/93); Exh. PCM-23 at p. PCM-00301 (2/94); Exh. PCM-24 at p. PCM- 00325 (4/94 supp.); Exh. PCM-25 at p. PCM-00349 (5/94 supp.). In addition, PJIGX's prospectuses systematically and uniformly emphasized the Fund's initial investment objective, policy and technique of seeking high current income while preserving principal investment by maintaining a portfolio security average weighted life of approximately three to five years. Id. PJIGX semi-annual and annual reports to shareholders systematically and uniformly emphasized a similar strategy, as well as the Fund portfolio's high quality and superior performance. Exh. PCM-40 at p. PCM-00649 (10/88); Exh. PCM-41 at p. PCM-00667 (3/89); Exh. PCM-42 at pp. PCM-00677, PCM-00679-80 (9/89); Exh. PCM-43 at pp. PCM-00689, PCM-00690 (3/90); Exh. PCM-44 at pp. PCM-00699-701 (9/90); Exh. PCM-45 at pp. PCM-00710-11 (3/91); Exh. PCM-46 at pp. PCM-00720-22 (1991); Exh. PCM-47 at pp. PCM-00731-34 (1992); Exh. PCM-48 at pp. PCM-007143-45 (1992); Exh. PCM-49 at pp. PCM-00755-57 (1993); Exh. PCM-50 at pp. PCM-00767, PCM-00769-70 (1993). The record therefore is conclusive that: (1) PJIGX's stated investment objective never changed over the life of the Fund; (2) PJIGX's emphasis on the relatively conservative composition of the Fund portfolio never changed over the life of the Fund; and (3) PJIGX's emphasis on preserving principal investment by maintaining a portfolio average weighted life of approximately three to five years never changed over the life of the Fund. It follows that none of these disclosures gave any indication of material changes to the Fund's investment objective, policy, techniques, strategy or composition.

PJIGX began to shift its portfolio composition from simple pass-through securities to CMO derivative securities late in 1991. Tr. 3155-56. The record indicates that by March 1993 PCM had invested somewhere between 93.1 % (Exh. PCM-49 at pp. PCM-00762-64) and 97.5% (Exh. DIV-229 at pp. DIV-09332-33) of the Fund's net assets in CMO derivative securities. The record also indicates that the Company had leveraged the Fund's total CMO derivative investments to as much as 149% of net assets through the dollar roll program by March 1993. Exh. PCM-49 at p. PCM-00760; Exh. DIV-229 at p. DIV-09332. Division maintains that these actions constituted material changes to the Fund's investment objective, strategy, composition, volatility and risk which PCM did not disclose, inadequately disclosed or affirmatively misrepresented.

It cannot reasonably be argued that PJIGX ever deviated from the "high level of current income" component of its stated investment objective. The record indicates that the Fund was ranked first among 65 short-term U.S. Government funds by Lipper Analytical Services for the fiscal year ended September 30, 1993, and first among 27 in the same category over the five year period ended September 30, 1993. Exh. PCM-50 at p. PCM-00769; Exh. PCM-289 at p. PCM-03762. The record also indicates that PJIGX's net assets increased by more than $500 million between January 1992 and September 1993. Exh. PCM-289 at p. PCM-03764. PJIGX broke multiple sales records over the same period. Exh. DIV-236 at p. 44.

Whether PJIGX materially deviated from the "consistent with preservation of capital" component of its stated investment objective turns on whether the Fund's investment risk profile increased to any significant degree and, if so, whether PCM adequately disclosed the increase. These determinations depend on analyses of the portfolio's more subtle characteristics (e.g., duration, convexity, average life, diversification, leverage), and the manner in which any material changes in those characteristics were disclosed.

2. Duration

As previously explained (see footnotes 13 and 14, supra), "duration" reflects the immediate percentage change in value a security or portfolio would experience in reaction to an interest rate change. Duration therefore is a risk indicator-- an attempt to quantify the price sensitivity or "volatility"of a particular security or portfolio. Exh. DIV-229 at p. DIV-09319; Exh. DIV-271 at p. 7; Tr. 285-86, 786-87, 1041, 3009. The record indicates that three different duration calculations were recognized in the CMO industry during the period between late 1991 and early 1994: modified duration, implied duration and effective duration. Tr. 285-87, 786-87, 1041-44. "Modified duration" estimates price sensitivity to future interest rate changes based on a weighted average time to receipt of principal and interest payments, expressed in present value. Exh. DIV-99 at p. DIV-07175; Exh. DIV-267 at pp. 16-17; Tr. 790, 1042.²² "Implied duration" relies on historical correlations between actual security prices and interest rates to estimate price sensitivity to future interest rate changes. Exh. DIV-267 at pp. 47-48; Tr. 297-98, 1043-44. "Effective duration" estimates price sensitivity to future interest rate changes through computer modeling techniques designed to simulate security price behavior under variable interest rate conditions. Exh. DIV-267 at p. 17; Tr. 790-91, 1044. Although the record suggests that PJIGX may have utilized duration calculi which relied on modified duration as well as implied duration (Tr. 298-99; Exh. DIV-99 at p. DIV-07175), the record is conclusive that PCM expressly disclosed Fund portfolio volatility to the public in terms of implied duration from at least January 1991 through September 1993. Exh. DIV-34 at pp. DIV-00791, DIV-00793, DIV-00795, DIV-00797, DIV-00799, DIV-00801, DIV-00803, DIV-00805, DIV-00807, DIV-00809, DIV-00811, DIV-00813, DIV-00815, DIV-00817.

Division maintains that PJIGX's reliance on implied duration was inappropriate. Division argues that implied duration was inherently inadequate as a volatility indicator insofar as CMO derivative securities were concerned because such securities' interest rate sensitivity is far more dynamic than the implied duration paradigm's exclusive reliance on historical security price/interest rate correlations presupposes. Division claims this inadequacy was generally acknowledged within the CMO derivative industry, and PCM's reliance on implied duration to estimate Fund volatility was therefore either intentionally or recklessly misleading. PCM disputes Division's claim that effective duration was the CMO derivative industry standard during the period at issue. Moreover, PCM emphasizes that actual post hoc comparisons between implied/effective duration predictions of Fund NAV responses to interest rate changes demonstrates that implied duration was a more accurate indicator than effective duration prior to early 1994. PCM also emphasizes that it conducted an exhaustive search for adequate effective duration analytics in 1993, but concluded that all available systems were inadequate. PCM maintains that it began reporting effective duration immediately after PCM tested and acquired what it considered to be an adequate system-- the Salomon Brothers Yield Book-- in mid-1994.

I note at the outset that industry standards, while material, are not determinative with respect to whether PCM's implied duration reliance/disclosure was appropriate and adequate. The record confirms that at least three different duration calculations were recognized in the CMO industry during the period between late 1991 and early 1994 (Tr. 285-87, 786-87, 1041-44), but does not establish that any of them was the industry standard. Moreover, Division argues that effective duration was the best available volatility indicator. This is not an "industry standards" argument; it is a "state-of-the-art" argument. It follows that while Division has introduced substantial evidence to support a determination that effective duration is superior to both modified duration and implied duration as a CMO derivative volatility indicator, Division has not established that effective duration was the industry standard between late 1991 and early 1994.²³

The record establishes that the essential difference among modified, implied and effective duration is the underlying cash flow assumption. Modified duration and implied duration assume cash flow remains constant as interest rates change; effective duration assumes cash flow varies with interest rate changes. Exh. DIV-229 at pp. DIV-00318-20; Exh. DIV-267 at pp. 46-47; Exh. DIV-271 at p. 7; Tr. 786-92, 1041-44. The record confirms that effective duration is superior to modified duration or implied duration as a CMO derivative volatility indicator because effective duration accounts for the fact that CMO derivative securities exhibit complex embedded options²⁴ which produce cash flow uncertainty. Exh. DIV-66 at p. DIV-02880; Exh. DIV-229 at pp. DIV-00318-20; Exh. DIV-267 at pp. 45-48; Exh. DIV-271 at pp. 6-7; Tr. 786-92, 1041-44. See also PCM RB at p. 10, n.1. The record also contains substantial unrebutted evidence that CMO portfolio managers of ordinary competence were aware of the fact that CMO derivative securities' uncertain cash flow characteristics could render modified/implied duration inadequate- even misleading- as a measure of price sensitivity/volatility. Exh. DIV-66 at p. DIV-02880; Exh. DIV-229 at pp. DIV-00318-20; Exh. DIV-267 at pp. 45-48; Exh. DIV-271 at pp. 6-7; Tr. 786-92, 1041-44. The record confirms that Bruntjen and Goldstein were aware of this deficiency long before March 1994. Exh. Div-70; Tr. 285-87, 307-09, 1429-31.

Although the record indicates PCM acquired and began using what the Company considered to be adequate effective duration analytics in mid-1994, it contains conflicting evidence with respect to whether adequate analytics were available prior to that time. Expert Division witnesses testified that at least three analytic systems available in 1993 reliably could estimate CMO effective duration.²⁵ Exh. DIV-267 at pp. 42-44; Exh. DIV-271 at p. 11; Tr. 789-90, 792-93, 1045-46. PCM concedes that various effective duration analytics were available prior to 1994, but contends that these systems' modeling algorithms/underlying databases were inadequate.²⁶ Tr. 311-13, 973-77, 3520-27, 4445-51. PCM buttresses its contention with extensive evidence demonstrating that the various effective duration analytics available in 1993 would have produced inconsistent results if applied to numerous securities in the Fund portfolio. Exh. PCM-63 at pp. PCM-01178-79, PCM-01200-07. PCM also emphasizes that a post hoc comparison between implied duration and effective duration demonstrates that the former more accurately reflected Fund NAV responses to interest rate changes prior to early 1994. Tr. 2667-68.

A conclusive determination with respect to which duration calculus PJIGX should have used in 1992/1993 is problematic. Division witnesses-- Mr. Gifford Fong in particular-- demonstrate both greater expertise and greater credibility with respect to whether adequate effective duration analytics were available to PCM during that period. Nevertheless, PCM's comparative analysis of the disparate results produced by the various effective duration analytics is troubling.²⁷ The difficulty in concluding which duration calculus PJIGX should have used in 1992/1993 is compounded by the fact that while effective duration was generally acknowledged to be a superior CMO derivative volatility indicator because it incorporated cash flow uncertainty, at least two other duration calculations were recognized in the CMO industry at that time, and none of the three was the established industry standard. I therefore find and conclude Division has not proven by a preponderance of the evidence that PCM's use/disclosure of implied duration, in itself, violated Section 17(a).²⁸

PCM maintains that the Fund's implied duration calculations/disclosures were at all times made in good faith and in compliance with industry standards. PCM argues that these circumstances undermine any claim that PCM intentionally or recklessly misrepresented Fund volatility to investors.²⁹ Once again, I note that while industry standards are material with respect to whether PCM's implied duration calculations/disclosures demonstrate good faith, they are not determinative of the issue. A practice may be universal within the industry and still be fraudulent. See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 274 (3d Cir. 1998) (citing Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1171-72 (2d Cir. 1970)). Accord The T.J. Hooper, 60 F.2d 737, 740 (2d Cir 1932), cert. denied, 287 U.S. 662 (1932). The pertinent inquiry is whether PJIGX's implied duration calculations/disclosures misrepresented or omitted any material fact in connection with the offer, sale or purchase of Fund securities. More specifically, did PCM's implied duration calculations/disclosures misrepresent or omit any fact which there was a substantial likelihood a reasonable investor would consider important in making an investment decision and would view as having significantly altered the total mix of available information? Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). I find and conclude that, in addition to PCM's actual conduct, industry standards are material considerations in answering this question.

PCM bases its claim of compliance with industry standards on the unrebutted expert opinion of Marc I. Steinberg.³⁰ The record indicates that Professor Steinberg performed a comparative analysis between PJIGX prospectuses/statements of additional information ("SAI")³¹ issued from 1991 through 1994 and similar materials issued by approximately twenty other mutual funds during the same period. Exh. PCM-62 at pp. PCM-01136-40; Tr. 4354-55. Professor Steinberg concluded that Fund prospectuses/SAIs were consistent with industry standards and adequately disclosed the risks associated with investing in the Fund (Exh. PCM-62 at pp. PCM-01136-40), ranking Fund disclosures "fairly much middle of the road" in comparison to the other materials he reviewed. Tr. 4356.

Professor Steinberg's expertise compels me to accept his conclusion that PJIGX prospectuses/SAIs issued from 1991 through 1994 were consistent with industry standards. In contrast, the record compels me to disregard Professor Steinberg's corollary conclusion that PJIGX prospectuses, SAIs and annual/semi-annual reports adequately disclosed the risks associated with investing in the Fund. Although Professor Steinberg indisputably is qualified to assess compliance with industry disclosure standards, he demonstrates scant expertise insofar as the esoteric risk characteristics of CMO derivative securities are concerned. Professor Steinberg confirmed that he has absolutely no experience analyzing any type of mortgage-backed security. Tr. 4382. He also confirmed that he conducted no analysis whatsoever of PJIGX's portfolio composition or risk profile. Id. at 4383. Accepting, arguendo, Professor Steinberg's conclusion that his twenty fund control group validly is analogous to PJIGX because control group prospectuses/SAIs disclose risk indicators (e.g., CMO derivative security investments, leverage, sale when-issued/dollar roll programs) common to PJIGX, it does not follow that the control group disclosures were in fact accurate or adequate with respect to either: (1) control group fund composition/fund composition risk implications; or (2) the impacts of CMO derivative security proportions, durations, convexities or leverages on control group fund risk profiles.³² I therefore find and conclude that Professor Steinberg's comparative analysis supports PCM's claim of good faith only to the extent that it establishes compliance with industry standards.

PCM cites specific changes to PJIGX prospectuses/SAIs, annual/semi-annual reports and investment executive directives to buttress its contention that any material changes in PJIGX portfolio composition and volatility were disclosed in good faith. PCM emphasizes first that it distributed copies of PJIGX's January 28, 1992 prospectus (Exh. PCM-18) to all Fund shareholders on February 25, 1992. The Company stresses that the prospectus cover letter highlighted the Fund's new ability to invest in CMOs, and specifically referenced information on page 5 of the prospectus regarding that ability. PCM underscores the fact that the January 28, 1992 prospectus (and subsequent prospectuses) provided specific information concerning Fund investment in CMOs and stripped mortgage-backed securities (e.g., IOs and POs), including caveats that these securities were derivative instruments with a potential to incur substantial losses under certain market conditions. PCM also underscores the fact that SAIs were incorporated into Fund prospectuses by reference, and could be obtained by shareholder request. PCM argues that the SAIs described PJIGX investment options and strategies at length and featured complete lists of securities held in the portfolio. The Company adds that similar information was provided in PJIGX annual/semi-annual reports to shareholders. Finally, PCM notes that while it could have relied exclusively on written public disclosures-- which, in themselves, exceeded minimum legal requirements-- the Company also encouraged its investment executives to ensure that PJIGX remained appropriate to client investment objectives and risk tolerance.

The record confirms that PJIGX's January 28, 1992 prospectus and February 25, 1992 cover letter highlighted a new Fund ability to invest in CMOs. Exh. PCM-18 at pp. PCM-00210-11; Exh. PCM-107. The record also confirms that the January 28, 1992 prospectus provided descriptive information regarding CMOs and stripped mortgage-backed securities, specifically defining the latter as "derivative multi-class mortgage securities" and indicating that both categories of securities could increase portfolio volatility/potential losses under specific market conditions. Exh. PCM-18 at pp. PCM-00210-11. Subsequent prospectuses reflect substantially the same descriptions and caveats. Exh. PCM-20 at pp. PCM-00233-34; Exh. PCM-21 at p. PCM-00255; Exh. PCM-22 at p. PCM-00277; Exh. PCM-23 at p. PCM-00303; Exh. PCM-24 at p. PCM-00327; Exh. PCM-25 at pp. PCM-00351-52. In addition, PJIGX's January 28, 1992 prospectus and subsequent prospectuses incorporate an SAI by reference, along with a notice that the SAI may be obtained free of charge from the Fund. Exh. PCM-18 at p. PCM-00204; Exh. PCM-20 at p. PCM-00227; Exh. PCM-21 at p. PCM-00249; Exh. PCM-22 at p. PCM-00270; Exh. PCM-23 at p. PCM-00296; Exh. PCM-24 at p. PCM-00320; Exh. PCM-25 at pp. PCM-00344. Each SAI includes a list of individual Fund securities, grouped into investment categories.³³ Exh. PCM-36 at p. PCM-00552; Exh. PCM-37 at pp. PCM-00579-81; Exh. PCM-38 at pp. PCM-00607-09; Exh. PCM-39 at pp. PCM-00637-41.

In addition, the record confirms that PJIGX's 1991 Annual Report notes that the Fund introduced CMOs into the portfolio early in the fiscal year. Exh. PCM-46 at p. PCM-00721. The fact that PJIGX held CMOs is referenced or otherwise reflected³⁴ in subsequent annual/semi-annual reports to shareholders. Exh. PCM-47 at pp. PCM-00734, PCM-00738-39; Exh. PCM-48 at pp. PCM-00744, PCM-00749-51; Exh. PCM-49 at pp. PCM-00756, PCM-00762-64; Exh. PCM-50 at pp. PCM-00767, PCM-00777-80. Finally, the record confirms that PCM issued a memorandum to Company investment executives recommending client reviews to ensure that PJIGX remained appropriate to client investment objectives and risk tolerances on August 18, 1992. Exh. PCM-110.

The preceding record evidence supports general conclusions that PCM timely and adequately disclosed the facts that: (1) PJIGX could and did invest in CMOs beginning in 1991; (2) the Fund progressively increased the proportion of CMO derivative securities held in its portfolio from early 1991 through at least March 1993; and (3) CMOs and other derivative securities may increase portfolio volatility/potential losses under specific market conditions. In addition, it establishes that PCM encouraged its investment executives to conduct client investment objective/risk tolerance reviews to ensure that PJIGX remained an appropriate investment vehicle on August 18, 1992. In retrospect, however, the same evidence would have supported a reasonable inference that PJIGX's CMO derivative investments did not significantly increase portfolio volatility. The February 25, 1992 cover letter highlighting the Fund's ability to invest in CMOs describes the securities simply as a mechanism to achieve greater fund management flexibility. Exh. PCM-107. The letter specifically assures shareholders of PCM's belief "that the use of these securities will in no way jeopardize the high quality or the AAA rating assigned to your fund . . . ." Id. (emphasis added). The January 28, 1992 prospectus reinforces this impression. Although the prospectus's CMO description expressly notes that "[i]nverse or reverse floating CMOs are typically more volatile than fixed or floating rate tranches of CMOs" and "[t]he Portfolio would be adversely affected by the purchase of such CMOs in the event of an increase in interest rates since the coupon rate thereon will decrease as interest rates increase," it also expressly states that the purpose of investing in such securities would be "to protect against a reduction in the income earned on the Portfolio's investments due to a decline in interest rates." Exh. PCM-18 at p. PCM-00211. This language suggests that inverse or reverse floating CMO investments would reduce portfolio volatility. Similarly, while the August 18, 1992 investment executive memorandum encouraged client investment objective/risk tolerance reviews to ensure that PJIGX remained an appropriate investment vehicle, it specifically was targeted to short-term (i.e. one year or less investment horizon) investors. Exh. PCM-110 at p. PCM-01402. The memorandum expresses Fund manager confidence that PJIGX remained appropriate to investors with a time horizon of at least one year based on the Fund's "moderate volatility" and "duration of 3.4 years." Id.

The record establishes that from January 1991 through September 1993 PCM disclosed implied durations for PJIGX ranging between 3.0 and 4.3 years. Exh. DIV-34 at pp. DIV-00791, DIV-00793, DIV-00795, DIV-00797, DIV-00799, DIV-00801, DIV-00803, DIV-00805, DIV-00807, DIV-00809, DIV-00811, DIV-00813, DIV-00815, DIV-00817. The record indicates that these figures imply a low to moderate portfolio volatility typically associated with risk-averse investment strategies. Exh. DIV-227 at p. DIV-07147; Exh. DIV-236 at p. 38; Exh. DIV-237 at pp. 59-64; Tr. 461-62, 679-83, 2082-87, 3311. The record, however, contains substantial evidence that PJIGX's CMO-driven volatility was appreciably greater than the low to moderate range which the Fund's implied duration disclosures suggested. Implied duration, by definition, does not reflect CMO derivative securities' inherent prepayment risk.³⁵ Exh. DIV-229 at p. DIV-00320; Exh. DIV-267 at pp. 46-48; Exh. DIV-271 at p. 6; Tr. 791-92, 1042-44. The Fund portfolio's increasing proportion of CMO derivative securities necessarily and progressively would have exacerbated this deficiency between late 1991 and March 1993. Tr. 3155-56; Exh. PCM-49 at pp. PCM-00762-64; Exh. DIV-229 at pp. DIV-09332-33. These facts suggest that implied duration calculations/disclosures necessarily would have understated PJIGX portfolio price sensitivity, thereby producing an inaccurate or misleading picture of Fund volatility. Exh. DIV-66 at p. DIV-02880. And since Bruntjen and Goldstein admittedly were aware of implied duration's inherent inability to account for the cash flow uncertainty exhibited by the Fund's ever-increasing proportion of CMO derivative securities (Exh. Div-70; Tr. 285-87, 307-09, 1429-31), the facts also suggest that PCM, Bruntjen and Goldstein should have known that continuing to calculate and disclose implied duration could produce an inaccurate or misleading picture of PJIGX price sensitivity/volatility. Moreover, while a number of Division witness Wiener's effective duration calculations are susceptible to legitimate criticisms concerning their derivation/accuracy (Tr. 1095-98, 1106, 1131, 2660-65), his examination is instructive in its core implication that performing an effective duration analysis of the PJIGX portfolio any time after March 31, 1993 would have revealed that implied duration almost certainly understated Fund volatility-- perhaps in significant degree.³⁶ Exh. DIV-229 at pp. DIV-09322-39; Exh. DIV-271 at p. 15. This indication, moreover, would have been consistent with independent broker-dealer appraisals: the record confirms that Kidder Peabody advised Bruntjen in late 1993 or early 1994 that PJIGX exhibited a "very long duration" (Tr. 841), and also that other broker-dealers calculated a portfolio duration of approximately fifteen years for the Fund in 1993. Tr. 2334-35.

PJIGX prospectuses, SAIs and annual/semi-annual reports dating at least through the end of 1993 are devoid of any suggestion that the implied duration figures disclosed for the Fund might understate PJIGX portfolio volatility. Exh. DIV-34 at pp. DIV-00791, DIV-00793, DIV-00795, DIV-00797, DIV-00799, DIV-00801, DIV-00803, DIV-00805, DIV-00807, DIV-00809, DIV-00811, DIV-00813, DIV-00815, DIV-00817. Also see generally Exh. PCM-12 through Exh. PCM-23; Exh. PCM-32 through Exh. PCM-39.³⁷ To the contrary, Fund prospectuses uniformly continued to emphasize the relatively conservative composition of the PJIGX portfolio. Exh. PCM-12 at p. PCM-00122 (6/88); Exh. PCM-14 at pp. PCM-00144-45 (1/90); Exh. PCM-16 at pp. PCM-00166-67 (1/91); Exh. PCM-17 at pp. PCM-00187-88 (6/91 supp.); Exh. PCM-18 at pp. PCM-00208-09 (1/92); Exh. PCM-20 at pp. PCM-00231-32 (5/92 supp.); Exh. PCM-21 at p. PCM-00253 (1/93); Exh. PCM-22 at p. PCM-00275 (3/93); Exh. PCM-23 at p. PCM-00301 (2/94); Exh. PCM-24 at p. PCM-00325 (4/94 supp.); Exh. PCM-25 at p. PCM-00349 (5/94 supp.). PJIGX marketing materials, seminars and sales presentations- many of which specifically addressed portfolio duration-- reflected this emphasis, as well as an emphasis on low to moderate portfolio volatility.³⁸ Exh. DIV-111 at pp. DIV-00957, DIV-00966; Exh. DIV-113 at p. DIV-07307; Exh. DIV-227 at p. DIV-07147; Exh. DIV-228; Exh. DIV-236 at pp. 36-38; Exh. DIV-237 at pp. 53-73; Tr. 461-65, 678-83, 759-63, 2086-93, 3311.

3. Convexity

Division alleges that the PJIGX portfolio exhibited extreme negative convexity, and this characteristic magnified the degree to which PCM's implied duration calculations and disclosures understated portfolio price sensitivity/volatility. Division maintains that PCM failed to disclose this fact- indeed, affirmatively misrepresented it - and that each behavior violated Section 17(a). PCM counters that it was not required to disclose PJIGX portfolio convexity. PCM also emphasizes that incorporating negative convexity into an effective duration calculation which less accurately correlated actual Fund NAV responses to interest rate changes than implied duration simply would have exacerbated effective duration's inaccuracy.³⁹

The record is conclusive that duration and convexity are intricately interrelated. Exh. DIV-66 at p. 02883; Exh. DIV-229 at pp. 09319-21. Convexity is the rate at which duration (i.e. price volatility) changes. Exh. DIV-66 at p. 02883. If duration is analogized to the speed of price changes, convexity would represent acceleration. Id. Negative convexity indicates that a security or portfolio will increase in duration/volatility (i.e. lose value) at a faster rate as interest rates rise than the security or portfolio will decrease in duration/volatility (i.e. gain value) as interest rates fall.⁴⁰ All things being equal, a negatively convex security or portfolio exhibits more potential to lose value than it does to gain value in an uncertain interest rate environment. Exh. DIV-66 at p. 02883; Exh. DIV-229 at p. 09320; Tr. 1049.

Because CMO derivative securities have embedded prepayment options, they exhibit negative convexity. Exh. DIV-66 at p. DIV-02880; Exh. DIV-229 at p. DIV-00320. The record indicates that somewhere between 93.1 % and 97.5% of PJIGX's net assets had been invested in CMO derivative securities by March 1993. Exh. PCM-49 at pp. PCM-00762-64; Exh. DIV-229 at pp. DIV-09332-33. The record also indicates that the Fund's total CMO derivative investments had been leveraged to as much as 149% of net assets through the dollar roll program by March 1993. Exh. PCM-49 at p. PCM-00760; Exh. DIV-229 at p. DIV-09332. It therefore is reasonable to infer that the PJIGX portfolio exhibited substantial negative convexity by March 1993. Unrefuted expert testimony supports this inference. Exh. DIV-229 at p. DIV-00335; Tr. 1049-50.

Applicable securities laws impose no specific obligation to disclose convexity characteristics. Moreover, the record reveals no specific disclosure or other reference to convexity which PCM could have misrepresented.⁴¹ I therefore find and conclude Division has not proven by a preponderance of the evidence that PCM 's failure to disclose Fund convexity, in itself, violated Section 17(a), or that PCM affirmatively misrepresented PJIGX portfolio convexity.

4. Average Life

Division contends that PJIGX's weighted average life disclosures were misleading, and violated Section 17(a) as a consequence. Division bases this contention on claims that: (1) weighted average life is an almost meaningless risk indicator for CMO derivative securities; and (2) PCM excluded inverse floating securities from the Fund's weighted average life calculation. PCM maintains that PJIGX's weighted average life disclosures could not have violated Section 17(a) because they were accurate and expressly indicated that the Fund's weighted average life calculation did not include inverse floating securities. PCM also maintains that Division submitted no evidence that PJIGX's weighted average life was material to investors.

The record establishes that PJIGX prospectuses systematically and uniformly linked the Fund objective of maintaining an average weighted portfolio maturity ranging from approximately three to five years to PJIGX's ability to maintain principal investment stability while seeking high current income. Exh. PCM-12 at p. PCM-00122; Exh. PCM-14 at p. PCM-00145; Exh. PCM-16 at p. PCM-00166; Exh. PCM-17 at p. PCM-00188; Exh. PCM-18 at p. PCM-00209; Exh. PCM-20 at p.PCM-00231; Exh. PCM-21 at p. PCM-00253; Exh. PCM-22 at p. PCM-00275; Exh. PCM-23 at p. PCM-00301; Exh. PCM-24 at p. PCM-00325; Exh. PCM-25 at p. PCM-00349. The record also establishes that PJIGX annual/semi-annual reports to shareholders systematically and uniformly linked the Fund's objective of providing high current income while preserving principal investment, as well as Fund volatility, to maintaining a portfolio security average weighted life of approximately three to five years. Exh. PCM-40 at p. PCM-00649; Exh. PCM-41 at p. PCM-00667; Exh. PCM-42 at p. PCM-00680; Exh. PCM-43 at p. PCM-00690 ; Exh. PCM-44 at pp. PCM-00700-01; Exh. PCM-46 at pp. PCM-00721-22; Exh. PCM-47 at p. PCM-00734; Exh. PCM-48 at pp. PCM-00744-45; Exh. PCM-49 at pp. PCM-00756-57; Exh. PCM-50 at pp. PCM-00767, PCM-00769. I find and conclude that prominently linking PJIGX's investment objective, strategy and portfolio volatility to the weighted average life of Fund securities in prospectuses and annual/semi-annual reports to shareholders establishes a substantial likelihood that reasonable investors would consider weighted average life important in making PJIGX investment decisions and would view the information as significantly altering the total mix of available information. It follows that PJIGX's weighted average life disclosures were material to investors.

Whether the weighted average portfolio life PCM disclosed was inaccurate or misleading depends on: (1) whether PCM adequately disclosed the fact that inverse floating securities were not included in the weighted average life calculation; (2) if so, whether it was appropriate for PCM to exclude inverse floating securities from the calculation; and (3) if so, whether weighted average portfolio life was a meaningful PJIGX risk indicator.

Each PJIGX prospectus issued after the Fund began to invest in CMO derivative securities expressly states that PJIGX "expects to maintain an average weighted maturity of its portfolio securities (other than inverse floating CMOs) ranging from approximately three to five years." Exh. PCM-18 at p. PCM-00209; Exh. PCM-20 at p. PCM-00231; Exh. PCM-21 at p. PCM-00253; Exh. PCM-22 at p. PCM-00275; Exh. PCM-23 at p. PCM-00301; Exh. PCM-24 at p. PCM-00325; Exh. PCM-25 at p. PCM-00349. (Emphasis added). I previously relied on this specific language (at least in part) to conclude that reasonable investors would consider weighted average life material to PJIGX investment decisions. Consequently, it would be disingenuous to conclude that reasonable investors would ignore the fact that the weighted average life disclosed for the Fund specifically excluded inverse floating CMOs. I find and conclude that PCM adequately disclosed the fact that inverse floating securities were not included in PJIGX's weighted average life calculations/disclosures.

The record does not reflect PCM's rationale for excluding inverse floating securities from PJIGX's weighted average life calculations/disclosures. Neither does it contain any support for PCM's assertion that PJIGX's weighted average life calculations/disclosures could not have been misleading simply because they were accurate. In fact, the evidence supports a contrary conclusion. Unrefuted record evidence indicates that inverse floating securities ranged between 47.4 % and 30.9 % of PJIGX's CMO holdings from March 31, 1993 to March 31, 1994. Exh. DIV-229 at pp. DIV-09332, DIV-09341, DIV-09346, DIV-09349. Moreover, the record indicates that these securities exhibited some of the highest levels of interest rate risk in the portfolio. Id. at p. DIV-09349. Conceding, arguendo, that PJIGX's weighted average life calculations/disclosures were accurate apart from the portfolio's inverse floating CMO component, the calculations/disclosures nevertheless could have been misleading. Indeed, is difficult to understand how the calculations/disclosures would not have been misleading in light of the Fund's considerable proportion of inverse floating securities and those securities' enhanced interest rate risk.

This concern is amplified by evidence that weighted average life was not a meaningful risk indicator for the PJIGX portfolio due to the portfolio's high total proportion of CMO derivative securities of various kinds. A security's weighted average life is the average time a dollar of principal is presumed to be outstanding and earning interest before being returned to the security holder. As with duration and convexity, however, the fact that CMO derivative securities exhibit complex embedded options introduces substantial prepayment/cash flow uncertainty. This uncertainty vitiates the presumed prepayment rate, thereby rendering the security's indicated sensitivity to interest rates highly unreliable. Exh. DIV-229 at pp. DIV-09318-19. Excluding securities which are especially interest rate-sensitive (e.g., inverse floaters) from weighted average portfolio life compounds the problem. Although PCM adequately disclosed the fact that inverse floating CMOs were excluded from PJIGX's weighted average life calculations/disclosures, and also may have accurately calculated/disclosed the portfolio's resultant weighted average life, its failure to caution investors that those calculations/disclosures might not be accurate portfolio volatility indicators could have been misleading-- particularly since PJIGX annual/semi-annual reports to shareholders expressly linked Fund volatility to the portfolio's average weighted life.⁴² Exh. PCM-43 at p. PCM-00690; Exh. PCM-44 at pp. PCM-00700-01; Exh. PCM-46 at p. PCM-00722; Exh. PCM-47 at p. PCM-00734; Exh. PCM-48 at p. PCM-00745; Exh. PCM-49 at p. PCM-00756; Exh. PCM-50 at pp. PCM-00767, PCM-00769.

Similar reasoning would apply to PCM's use of the Merrill Lynch 3-5 Year Treasury Bond Index as a benchmark for Fund performance. PJIGX annual/semi-annual reports to shareholders systematically compared Fund performance to that index. Exh. PCM-42 at p. PCM-00677; Exh. PCM-43 at p. PCM-00689 ; Exh. PCM-44 at p. PCM-00699; Exh. PCM-45 at p. PCM-00710; Exh. PCM-46 at p. PCM-00720; Exh. PCM-47 at p. PCM-00732; Exh. PCM-48 at p. PCM-00743; Exh. PCM-49 at p. PCM-00755; Exh. PCM-50 at pp. PCM-00769-70. PJIGX marketing materials and sales presentations made similar comparisons. Exh DIV-111 at pp. 00955-58; Exh DIV-115 at pp. 09226-27, 09265-66; Tr. 465. I find and conclude that expressly comparing Fund performance to the Merrill Lynch 3-5 Year Treasury Bond Index establishes a substantial likelihood that reasonable investors would consider the comparisons important in making PJIGX investment decisions and would view the comparisons as significantly altering the total mix of available information. It follows that PPJIGX/Merrill Lynch 3-5 Year Treasury Bond Index comparisons were material to investors.

The record casts doubt on PCM's claim that the Merrill Lynch 3-5 Year Treasury Bond Index was an appropriate risk/performance benchmark for PJIGX. The Fund's distinguishing feature was an extremely high proportion of CMO derivative securities. Exh. PCM-49 at pp. PCM-00760, PCM-00762-64; Exh. DIV-229 at pp. DIV-09332-33. The Merrill Lynch 3-5 Year Treasury Bond Index contained no CMOs/CMO derivative securities whatsoever. Tr. 3191, 3193. Moreover, the record indicates that PJIGX exhibited multiples of the interest rate sensitivity exhibited by the Merrill Lynch 3-5 Year Treasury Bond Index. Exh. DIV-229 at p. DIV-09335; Exh. DIV-271 at pp. 1, 10.

5. Diversification

Division contends that PCM affirmatively misrepresented PJIGX portfolio diversification. Division takes the position the portfolio was not diversified because it was comprised almost exclusively of interest rate-sensitive CMO derivative securities. Division essentially argues that these securities were heavily biased toward the prevailing downward trend in interest rates, and therefore did not exhibit the basic covariance⁴³ customarily exhibited by a diversified investment strategy. As a consequence, Division concludes that PJIGX annual/semi-annual reports, marketing materials and sales presentations were false or misleading insofar as they indicated that the Fund portfolio was diversified. PCM counters that Division misconstrues PJIGX statements concerning portfolio diversification and balance. According to PCM, these statements accurately reflect Bruntjen's strategy of cash flow diversification across a spectrum of securities exhibiting different cash flow characteristics. PCM maintains that SEC examiners understood and specifically approved this method of portfolio diversification in the context of a February 1994 examination of Piper's entire fund complex.

PJIGX's 1993 semi-annual report states that the Fund's "holdings are well diversified across fixed income market sectors that are characterized by different types of price behavior. This broad-based diversification enables your fund to benefit in a variety of economic situations." Exh. PCM-49 at p. PCM-00757. PJIGX's 1993 annual report states: "MOST IMPORTANT, WE ADHERE TO THE PROVEN INVESTMENT PRINCIPLE OF DIVERSIFICATION. [The Fund] is invested in more than 200 different securities which offset one another and help the fund to perform well in a variety of economic scenarios." Exh. PCM-50 at p. PCM-00769. Fund summaries issued from October 1990 through June 30, 1993 systematically and uniformly state: "The [fund/portfolio] is structured to minimize the normal principal fluctuations that an investment in fixed income securities has in response to changes in market conditions."⁴⁴ Exh. DIV-34 at pp. DIV-00790, DIV-00791, DIV-793, DIV-00795, DIV-00797, DIV-00799, DIV-00801, DIV-00803, DIV-00805, DIV-00807, DIV-00809, DIV-00811, DIV-00813, DIV-00817. In addition, the record confirms that PCM systematically emphasized PJIGX portfolio diversification in Fund sales presentations. Exh. DIV-111 at p. DIV-00960; Exh. DIV-115 at pp. DIV-09219, DIV-09259; Tr. 3314.

PCM does not claim that the PJIGX portfolio was diversified in the ordinary sense of offsetting risks, and the record confirms that it was not. Exh. DIV-112; Exh. DIV-229 at pp. DIV-09314, DIV-09344. Bruntjen himself conceded this fact. Tr. 1427. Accepting, arguendo, PCM's claim that PJIGX annual/semi-annual report, marketing material and sales presentation statements concerning portfolio diversification actually referenced Bruntjen's unique cash flow management strategy, how would a reasonable investor glean that information? The statements themselves give no hint of it. Instead, they affirmatively suggest diversification in the ordinary sense. For example, PJIGX's 1993 annual report emphasizes that the Fund "ADHERE[S] TO THE PROVEN INVESTMENT PRINCIPLE OF DIVERSIFICATION" (italics added). Exh. PCM-50 at p. PCM-00769. This expressly implies a familiar concept. Further, the report states that PJIGX "is invested in more than 200 different securities which offset one another and help the fund to perform well in a variety of economic scenarios" (Id. (emphasis added)), again implying diversification in the familiar sense. Further undermining PCM's reliance on technical accuracy is the fact that Bruntjen's unorthodox strategy of purchasing a variety of CMO derivative securities at a discount and actively managing the cash flows as they accreted to par (Tr. 1435-36; Exh. PCM-919 at pp. PCM-16714-15) mystified even peer fund managers.⁴⁵

6. Leverage

Division also contends that PCM affirmatively misrepresented the nature and implications of Fund leverage. According to Division, PCM falsely characterized PJIGX's sale-when-issued/ dollar roll program as a risk hedging mechanism when in fact the program aggravated Fund volatility. Division further alleges that PCM misrepresented program revenues as "fee income" instead of income generated through assumption of additional risk. PCM disputes any contention that Fund leverage was either misrepresented or inadequately disclosed. PCM maintains that PJIGX sale-when-issued program disclosures were at all times at least industry standard, and were enhanced to reflect potential Fund performance under extreme market conditions immediately after the 1994 bond market crash.

The record establishes that PCM at all times prominently disclosed the fact that Fund investments included forward commitments and when-issued securities. From the Fund's inception in 1988, PJIGX prospectuses systematically and uniformly included a section designated Forward Commitments and When-Issued Securities under the heading Investment Policies and Techniques. Exh. PCM-12 at p. PCM-00124; Exh. PCM-14 at pp. PCM-00146-47; Exh. PCM-16 at pp. PCM-00167-68; Exh. PCM-17 at pp. PCM-00189-90; Exh. PCM-18 at pp. PCM-00211-12; Exh. PCM-20 at pp.PCM-00234-35; Exh. PCM-21 at p. PCM-00256; Exh. PCM-22 at p. PCM-00278; Exh. PCM-23 at p. PCM-00304; Exh. PCM-24 at p.PCM- 00328; Exh. PCM-25 at p. PCM-00352. (Italics and emphasis in originals). In addition, the record establishes that the dollar roll program was at all times an integral aspect of the Fund. Tr. 3172. PJIGX prospectuses dated from June 20, 1988 through February 1, 1994 systematically and uniformly represented that "[t]he use of when-issued transactions and forward commitments enables the Portfolio to hedge against anticipated changes in interest rates and prices." Exh. PCM-12 at p. PCM-00124; Exh. PCM-14 at p. PCM-00146; Exh. PCM-16 at p. PCM-00168; Exh. PCM-17 at p. PCM-00190; Exh. PCM-18 at p. PCM-00211; Exh. PCM-20 at p. PCM-00234; Exh. PCM-21 at p. PCM-00256; Exh. PCM-22 at p. PCM-00278; Exh. PCM-23 at p. PCM-00304. PJIGX prospectus supplements dated April 22, 1994 and May 23, 1994 deleted this representation, stating instead that purchasing securities on a when-issued or forward commitment basis involved additional risk which could increase Fund NAV volatility. Exh. PCM-24 at p. PCM-00328; Exh. PCM-25 at p. PCM-00352.

The record indicates that PJIGX used the sale-when-issued/dollar roll program to leverage the Fund's total CMO derivative investments to approximately 149% of net assets by March 1993, and to approximately 160% of net assets by March 1994. Exh. PCM-49 at p. PCM-00760; Exh. PCM-51 at p. PCM-00795; Exh. DIV-229 at pp. DIV-09332, DIV-09346. This leverage was achieved principally through the purchase of additional CMO derivative securities and, as previously discussed, necessarily would have compounded any negative impacts attributable to inflated duration/negative convexity arising out of the underlying portfolio's overwhelming proportion of CMO derivative securities. More important, dollar roll programs are based on systematic security repurchase transactions through which security positions are sold to broker-dealers at specific prices/points in time with concomitant seller obligations to repurchase the positions at specified (lower) prices/future points in time. A fundamental feature of such transactions is that the seller bears the full risk of any change(s) in value over the intervening period-- even where the seller does not actually own the securities during that period.⁴⁶ Exh. DIV-229 at pp. DIV-09326-27. It follows that a leveraged dollar roll program necessarily increases risks associated with changes in security prices, particularly if those prices are acutely sensitive to interest rates. Id. at p. DIV-09327; Tr. 279-81, 3172-75. I therefore find and conclude it was patently inaccurate to characterize the PJIGX dollar roll program as "a hedge against anticipated changes in interest rates and prices."⁴⁷

The record provides inadequate basis for me to determine whether it was accurate to characterize PJIGX dollar roll incentive receipts as "fees" in Fund prospectus and annual/semi-annual reports. Division briefs and Exh. DIV-229 at pp. DIV-09327-28 imply that "fee income" is a term of art, but offer no evidence to support a conclusion to that effect-- let alone that the term inaccurately was applied to PJIGX dollar roll incentive receipts. Consequently, I find and conclude Division has not proven that PJIGX improperly characterized dollar roll incentive receipts.

(d) Goldstein-Specific Issues

Goldstein highlights the fact that she has been charged with primary violations of Section 17(a). Goldstein contends she cannot be held primarily liable under Section 17(a) because: (1) she neither made nor substantially participated in making the disclosures at issue; (2) she had no duty to disclose any material omission; (3) any oral misrepresentations are not actionable; and (4) Division failed to prove that she acted with the requisite scienter. Goldstein bases these contentions principally on the claim that while her title indicated she was PJIGX's "co-manager," her actual management expertise, authority and responsibilities paled in comparison to Bruntjen. She argues that Bruntjen alone had the expertise, responsibility and actual authority to formulate, review and approve Fund investments, disclosures, marketing materials and sales presentations, and that she may be held primarily liable neither for Bruntjen's actions in this regard nor for her own at his direction. Division adamantly disputes Goldstein's claims, arguing that she played substantial roles in PJIGX portfolio management and in formulating/making misleading risk disclosures in Fund prospectuses, marketing materials and sales presentations.

Goldstein's position relies in part on the legal conclusion that she personally had to create or make a misrepresentation concerning the Fund to be held primarily liable under Section 17(a). She bases this conclusion chiefly on Wright v. Ernst & Young LLP, 152 F.3d 169, 174-75 (2d Cir. 1998) (Wright), which held that a secondary actor could not incur primary liability for a statement not attributed to that specific actor at the time of public dissemination.⁴⁸ Such reliance, however, is misplaced. In contrast to the instant case, Wright's secondary actor was a third-party auditor. Goldstein was a PCM Vice President and the Fund's ostensible co-manager. She was not a "secondary actor" in the sense Wright uses that term. This conclusion is buttressed by the fact that Central Bank clearly is not intended to exempt all persons who indirectly violate securities laws from primary liability for such violations. Instead, the exemption is confined to tangential actors. Central Bank expressly distinguishes "persons who engage, even indirectly, in proscribed activity" from "persons who do not engage in the proscribed activities at all, but who give a degree of aid to those who do"-- exempting only the latter from primary liability.⁴⁹ 511 U.S. at 176 (emphasis added). Contrary to Goldstein's position, then, neither Wright nor Central Bank supports a conclusion that she personally had to create or make a misrepresentation to be held primarily liable under Section 17(a). Both cases support a conclusion that Goldstein's conduct should be evaluated under the "substantial participation" standard.

PJIGX prospectuses dated from January 29, 1990 to February 1, 1994⁵⁰ systematically and uniformly state that "Worth Bruntjen, Senior Vice President of the Advisor and of the Investment Trust, manages the Portfolio." Exh. PCM-14 at p. PCM-00148; Exh. PCM-16 at p. PCM-00169; Exh. PCM-17 at p. PCM-00191; Exh. PCM-18 at p. PCM-00213; Exh. PCM-20 at p. PCM-00236; Exh. PCM-21 at p. PCM-00257; Exh. PCM-22 at p. PCM-00280. PJIGX prospectuses dated from January 29, 1990 through January 29, 1991 state that "Marijo Goldstein is co-manager of the Portfolio" (Exh. PCM-14 at p. PCM-00148; Exh. PCM-16 at p. PCM-00170; Exh. PCM-17 at p. PCM-00192), and PJIGX prospectuses dated from January 28, 1992 through January 28, 1993 state that "Marijo Goldstein, Vice President of the Advisor and of the Investment Trust, is co-manager of the Portfolio." ⁵¹ Exh. PCM-18 at p. PCM-00213; Exh. PCM-20 at p. PCM-00236; Exh. PCM-21 at p. PCM-00258; Exh. PCM-22 at p. PCM-00280. PJIGX's March 31, 1989 semi-annual report to shareholders characterizes Bruntjen as the Fund "manager" and Goldstein as the Fund "assistant portfolio manager." Exh. PCM-41 at p. PCM-00668. Subsequent annual/semi-annual reports to shareholders systematically⁵² characterize both Bruntjen and Goldstein as Fund "co-manager." Exh. PCM-42 at pp. PCM-00679-80; Exh. PCM-43 at p. PCM-00689; Exh. PCM-44 at pp. PCM-00700-01; Exh. PCM-45 at p. PCM-00710; Exh. PCM-46 at pp. PCM-00721-22; Exh. PCM-47 at p. PCM-00734. Bruntjen is designated "Senior Vice President" throughout PJIGX's annual/semi-annual reports; Goldstein is designated "Vice President" beginning with the March 31, 1991 Semi-Annual Report. Exh. PCM-45 at p. PCM-00718. I find and conclude that while PJIGX prospectuses and annual/semi-annual reports to shareholders reflect Bruntjen primacy over Goldstein in the PJIGX management hierarchy, they also imply that Goldstein had a significant Fund management role.⁵³

Other record evidence indicates that Goldstein's expertise, responsibility and authority with respect to Fund investments, disclosures and related management activities were in fact significant. Goldstein's own testimony demonstrates substantial expertise concerning CMO derivative securities. Tr. 262-322, 3737-38. Bruntjen's testimony confirms this expertise. Tr. 1379-82. In addition, both Bruntjen and Goldstein acknowledged that Goldstein shared material Fund management responsibilities with Bruntjen- including certain investment decisions, securities transactions, disclosure/marketing materials input/review and participation in sales meetings. Tr. 231-32, 260-61, 318-47, 1382-84, 1389-92, 1408, 3734-55. Goldstein also was regarded and consulted as PJIGX's "co-manager" (along with Bruntjen) within PCM itself. Exh. DIV-237 at pp. 27-28; Tr. 344-45, 3311, 4326. Goldstein, moreover, was the only PJIGX assistant portfolio manager (among at least three) to receive a "co-manager" designation.

I am acutely mindful of the need to look beyond titles. But while Goldstein's designation as Fund "co-manager" indisputably exaggerated her significance vis-a-vis Bruntjen, it is equally indisputable that the designation accurately reflected her position, authority, expertise and responsibilities within the PJIGX management hierarchy to a considerable degree. She was Bruntjen's Fund management lieutenant, and her "co-manager" designation reflected the fact that she shared substantial management authority and responsibilities with him. Moreover, Goldstein was perceived to share substantial management authority, expertise and responsibilities with Bruntjen- both within PCM and in the external securities market/industry. The pertinent inquiry is whether this perception, coupled with Goldstein's actual authority, expertise, responsibilities and conduct, render her liable for any violation of Section 17(a).

The record conclusively establishes that Bruntjen was predominately, if not exclusively, responsible for formulating and implementing PJIGX's investment strategy. Exh. PCM-288 at p. PCM-03756; Exh. PCM-294; Exh. PCM-543 at p. PCM-11022; Tr. 1383-84, 2043, 2219, 2839-40, 4026-27. I therefore find and conclude that Goldstein did not substantially participate in formulating or implementing the Fund's investment strategy and, as a consequence, may not be held liable under Section 17(a) for any material deviation from PJIGX's stated investment objective.

Whether Goldstein may be held liable under Section 17(a) for failing to disclose a material deviation from PJIGX's stated investment objective is more problematic. Such a failure may consist of an affirmative misrepresentation or an omission, the latter of which implies a duty to disclose. Goldstein contends that her actual portfolio management expertise, authority and responsibilities did not impose a duty to disclose and, in any event, she reasonably believed that Bruntjen's strategy for achieving the Fund's stated investment objective was appropriate. I reject Goldstein's contention outright insofar as it is predicated on her "co-manager" disclaimer. I find and conclude that Goldstein had sufficient actual Fund management authority/responsibility to impose a general duty to disclose any material deviation from PJIGX's stated investment objective of which she knew or reasonably should have known. But while I have no doubt that Bruntjen was sophisticated enough in the interplay among the esoteric risk characteristics (duration, negative convexity, leverage) of a portfolio dominated by CMO derivative securities to know whether PJIGX's overall investment strategy/portfolio composition had become materially inconsistent with the Fund's stated investment objective, the record does not conclusively establish that Goldstein was sophisticated enough to make that determination. Moreover, the record indicates that it was reasonable for Goldstein to rely on Bruntjen in this regard. He was an industry-acknowledged CMO "wizard" (Exh. PCM-288 at pp. PCM-03755-56) with decades of experience; Goldstein was not.

Turning to specific disclosures/representations, I again find and conclude that Goldstein's "co-manager" position in itself imposed on her a general duty to ensure that material Fund disclosures/representations were accurate and complete insofar as it was within her authority and expertise to do so. The record, moreover, confirms that Goldstein actually participated in the preparation, review and issuance of PJIGX prospectuses, summaries, annual/semi-annual reports and letters to shareholders. Tr. 1421-26.⁵⁴ The record also indicates that Goldstein had authority equal to Bruntjen with respect to the descriptive terminology used in Fund disclosures and marketing materials. Id. at 1423. It follows that Goldstein also had a specific duty to ensure that material Fund disclosures/representations were accurate and complete insofar as it was within her expertise and "co-manager" responsibilities to do so. See, e.g., In Re Union Carbide Corp. Consumer Products Business Securities Litigation., 666 F.Supp. 547, 560-63 (S.D.N.Y. 1987).

The actual degree of Goldstein's participation and substantive input with respect to PJIGX prospectuses is indeterminate. The record does not establish that she was responsible for composing or drafting prospectus language, or that she in fact composed or drafted any such language. Although the record indicates that Goldstein reviewed at least some prospectus language, it does not establish the parameters or extent of her review, let alone whether she actually commented on the language or formally approved it. The tenuous nexus between Goldstein and PJIGX prospectus disclosures does not satisfy the "substantial participation" standard, and compels me to find and conclude that she cannot be held primarily liable under Section 17(a) for any Fund prospectus disclosures or omissions.

The record contains conflicting evidence with respect to Goldstein's involvement with PJIGX marketing materials. It contains various annual/semi-annual report and Fund summary "project files" reflecting no Goldstein participation whatsoever.⁵⁵ Exh. PCM-175; Exh. PCM-176; Exh. PCM-178; Exh. PCM-179; Exh. PCM-180; Exh. PCM-181; Exh. PCM-182. It also contains testimony from PCM managers of shareholder and broker/dealer communications indicating that Goldstein was not primarily responsible for the content of Fund summaries, annual/semi-annual reports and letters to shareholders. Tr. 3545-49, 4312-20. This evidence suggests that Goldstein's participation was not substantial. Nevertheless, Bruntjen testified that Goldstein participated with him⁵⁶ in the preparation, review and revision of Fund summaries, annual/semi-annual reports and letters to shareholders. Id. at 1421-25. And while Goldstein generally denies such participation (Id. at 347-51, 3742-45), she and Bruntjen systematically are featured with equal prominence-- through pictures, as well as "co-manager" designations and signatures-- in these materials beginning with the Fund's September 30, 1990 Annual Report. Exh. PCM-44 at pp. PCM-00700-01. This evidence suggests affirmative Goldstein input, review and approval-- strong indicia of substantial participation. On balance, I find and conclude that Bruntjen was primarily responsible for the content of PJIGX summaries, annual/semi-annual reports and letters to shareholders, but Goldstein substantially participated in at least the review and issuance of those materials. It follows that Goldstein may be held liable under Section 17(a) for material Fund summary, annual/semi-annual report or letter to shareholders misrepresentations or omissions if she did not exercise the standard of care appropriate to her actual authority, responsibilities and expertise.

The same holds true for material misrepresentations or omissions in the sales presentation context.⁵⁷ Bruntjen testified that one of the Fund co-manager responsibilities Goldstein shared with him was to meet with existing and prospective clients. Tr. 1389. He also confirmed that Goldstein actually participated in such meetings with both clients and brokers. Id. at 1392-94. Goldstein admitted that she personally participated in presentations to clients as well as brokers. Id. at 332, 340.

In light of Goldstein's actual Fund management authority, responsibilities and expertise vis-a-vis Bruntjen, I deem it inappropriate to hold her liable under Section 17(a) for any reckless PJIGX omission or misrepresentation concerning Fund composition, duration, performance, weighted average life, diversification or leverage. Bruntjen assumed primary responsibility for such omissions/misrepresentations, and I will not find or conclude otherwise. This fact notwithstanding, Goldstein cannot legitimately claim to bear no responsibility whatsoever in this regard. She was not Bruntjen's administrative assistant; she was PJIGX's co-manager. This designation alone imposed some degree of accountability on Goldstein. So, too, did her actual Fund management authority, responsibilities and expertise. Goldstein's accountability in this regard should not be over-emphasized. At a minimum, however, she clearly either knew or should have known that it was materially misleading: (1) to disclose/represent the Fund's implied duration without at least adding a caveat concerning its limited utility as a PJIGX risk/volatility indicator; and (2) to characterize PJIGX's sale when-issued/dollar roll program as a risk/volatility hedge. The record is devoid of any evidence that Goldstein ever so much as expressed these concerns to Bruntjen or anyone else at PCM, let alone in the context of the sales/broker presentations in which she actively participated. In this, I find and conclude that Goldstein deviated from the minimum standard of care imposed by her position, authority, responsibilities and expertise, and therefore was negligent. This negligence violated Sections 17(a)(2) and 17(a)(3).

(e) Summary of Rulings

28 U.S.C. § 2462 establishes a five year statute of limitations for imposing sanctions/ penalties pursuant to Section 17(a), and Division therefore may not seek sanctions or penalties against PCM or Goldstein for any alleged violations of Section 17(a) which occurred prior to July 28, 1993. Division is not precluded from seeking cease and desist orders for alleged violations of Section 17(a) which occurred prior to July 28, 1993. I expressly find and conclude that any Section 17(a) violation(s) addressed herein are part of a continuing and systematic course of conduct, a material part of which occurred after July 28, 1993.

Although PJIGX never deviated from the "high level of current income" component of its stated investment objective, I find and conclude that the Fund materially deviated from the "consistent with preservation of capital" component of the stated investment objective.⁵⁸ I further find and conclude that this deviation was inadequately disclosed. PJIGX portfolio composition, duration, convexity and leverage all changed dramatically between late 1991 and early 1994. These changes were intricately interrelated. Changes in portfolio composition drove changes in duration and convexity. Leverage compounded the situation. All of these changes reinforced one another, compositely increasing Fund risk and volatility. Whether any of them alone was sufficiently fundamental to warrant particularized disclosure need not be addressed in this context: in combination, they certainly had profound material impacts on Fund performance and volatility, both of which warranted more meaningful disclosures than the Fund made. I find and conclude that at least at all times since March 1993, PJIGX prospectuses, annual/semi-annual reports and marketing materials/presentations specifically should have disclosed in general narrative terms the facts that: (1) PJIGX was predominantly invested in CMO derivative securities; (2) the Fund's superior performance was primarily attributable to those securities; and (3) the proportion of CMO derivative securities contained in the PJIGX portfolio significantly increased portfolio volatility. I further find and conclude that PJIGX's failure to make such disclosures prior to the Fund's collapse⁵⁹ was, at a minimum, a highly unreasonable departure from standards of ordinary care, and therefore violated Section 17(a).

In addition, PJIGX omitted or misrepresented a number of discrete material facts concerning Fund composition, duration, performance, weighted average life, diversification and leverage. Although the Fund was not required to calculate/disclose effective duration, implied duration undeniably devolved into a markedly less meaningful volatility indicator as the portfolio's proportion of CMO derivative securities swelled over time. Since Bruntjen and Goldstein either knew or should have known this fact, it was misleading for PCM⁶⁰ to continue to disclose implied duration without at least adding a caveat concerning implied duration's limited utility as a volatility indicator for a portfolio dominated by CMO derivative securities. PJIGX's overwhelming proportion of CMO derivative securities also rendered it misleading for the Fund to continue: (1) to use the Merrill Lynch 3-5 Year Treasury Bond Index as a benchmark of Fund performance; and (2) to emphasize weighted average portfolio life as an appropriate risk/volatility indicator-- particularly since the implications of excluding inverse floating CMOs from the portfolio's weighted average life calculus were not disclosed. Finally, it was affirmatively misleading to characterize Bruntjen's cash flow management "diversification" and Fund leverage as risk/volatility hedges. I find and conclude there was a substantial likelihood that a reasonable investor would have considered each of the preceding omissions/misrepresentations important in making PJIGX investment decisions and would have viewed any of them as significantly altering the total mix of available information. I further find and conclude that each constituted a highly unreasonable departure from standards of ordinary care, and violated Section 17(a) as a consequence.⁶¹

Having been charged with primary violations of Section 17(a), Goldstein either must have made or substantially participated in the specified violations. Although Goldstein's Fund "co-manager" designation exaggerated her significance vis-a-vis Bruntjen, the designation generally reflected her true position, authority, expertise and responsibilities within the PJIGX management hierarchy. Nevertheless, Goldstein did not substantially participate in formulating or implementing PJIGX's investment strategy, and consequently may not be held primarily liable under Section 17(a) for any material deviation from the Fund's stated investment objective. Neither may she be held primarily liable under Section 17(a) for failing to disclose a material deviation from the Fund's stated investment objective or for PJIGX's failure to make the three narrative disclosures enumerated supra. Goldstein had sufficient actual Fund management authority/responsibility to impose a general duty to disclose any material deviation of which she knew or reasonably should have known, but the record does not conclusively establish that she knew/reasonably should have known the Fund had materially deviated from its stated investment objective.

Goldstein's "co-manager" position imposed a general duty to ensure that material Fund disclosures/representations were accurate and complete insofar as it was within her authority and expertise to do so. Her "co-manager" responsibilities also imposed a specific duty to ensure that material Fund disclosures/representations were accurate and complete insofar as it was within her expertise to do so. Goldstein did not substantially participate in formulating or making PJIGX prospectus disclosures, and therefore cannot be held primarily liable under Section 17(a) for any specific Fund prospectus misrepresentations or omissions. Although Bruntjen was primarily responsible for the content of PJIGX summaries, annual/semi-annual reports and letters to shareholders, Goldstein substantially participated in at least the review and issuance of those materials. As a general proposition, Goldstein may be held primarily liable under Section 17(a) for material Fund summary, annual/semi-annual report or letter to shareholders misrepresentations or omissions if she did not exercise the standard of care appropriate to her actual authority, responsibilities and expertise. She also may be held primarily liable under Section 17(a) for material misrepresentations or omissions in the sales presentation context.

Goldstein's actual Fund management authority, responsibilities and expertise vis-a-vis Bruntjen render it inappropriate to hold her liable under Section 17(a) for any reckless PJIGX omissions/misrepresentations concerning Fund composition, duration, performance, weighted average life, diversification or leverage. Goldstein nevertheless cannot legitimately claim to bear no responsibility whatsoever in this regard. She was PJIGX's co-manager. This designation, coupled with Goldstein's actual Fund management authority, responsibilities and expertise, imposed a minimum duty on her to attempt to prevent the Fund from making misleading disclosures or representations concerning implied duration's utility as a PJIGX risk/volatility indicator and the Fund's sale when-issued/dollar roll program qua risk/volatility hedge. Goldstein's failure to make any such attempt renders her primarily liable for negligence under Sections 17(a)(2) and 17(a)(3).

B. Possible Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Based on Inadequate Risk Disclosure

The elements for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder are essentially identical to the elements for alleged violations of Section 17(a) of the Securities Act. Any alleged violation(s) of Section 10(b) and Rule 10b-5 based on inadequate risk disclosure therefore are resolved in accordance with the analyses and determinations made in Section II-A of this Initial Decision.

C. Possible Violations of Section 13(a)(3) of the Investment Company Act Based on Inadequate Risk Disclosure

Section 13(a)(3) of the Investment Company Act prohibits any registered investment company from deviating from its stated investment policies if a change in those policies requires shareholder approval. 15 U.S.C. § 80a-13(a)(3). PJIGX was a registered investment company whose stated investment objective could not be changed without shareholder approval.

1. Party Positions

Division alleges that PCM-- through Bruntjen and Goldstein-- aided, abetted and caused PJIGX to violate Section 13(a)(3) by deviating from the Fund's stated investment objective without shareholder approval through their day-to-day management of PJIGX assets. Exh. PCM-1 at p. PCM-00005 (¶ T). PCM contends that Division at most established a change in PJIGX investment techniques or strategy, and this provides inadequate basis to hold PCM liable pursuant to Section 13(a)(3). PCM maintains that the Company reasonably believed PJIGX's investment strategy would enable the Fund to meet its stated investment objectives, arguing that the logical implication of Division's position is that Section 13(a)(3) liability would attach any time an investment strategy failed. Goldstein endorses PCM's arguments. In addition, Goldstein maintains she cannot be held liable pursuant to Section 13(a)(3) because she did not substantially participate in any PJIGX deviation from the stated investment objective.

2. Findings of Fact/Conclusions of Law

I previously found and concluded that while PJIGX never deviated from the "high level of current income" component of its stated investment objective, the Fund materially deviated from the "consistent with preservation of capital" component of that objective. I based that finding/ conclusion on a determination that the deviation was clearly distinguishable from changes in any underlying technique or strategy used to meet the objective in that the deviation was pervasive. PJIGX's intricately interrelated portfolio composition, duration, convexity and leverage all were changed dramatically between late 1991 and early 1994. The changes reinforced one another, considerably increasing overall Fund risk and volatility. In accordance with the analyses and determinations made in Section II-A of this Initial Decision, I find and conclude that the overall increase in PJIGX's risk/volatility profile constituted a material deviation from the Fund's stated investment objective which did not receive shareholder approval in violation of Section 13(a)(3).

Although I am reluctant to expand this discussion, PCM's insistence that it cannot be held responsible for portfolio management strategy and technique warrants further comment. The body of evidence before me consistently indicates that PJIGX fell victim to a form of myopia, focusing on one component of the stated investment objective (high income) to the progressive exclusion of the other (capital preservation). To illustrate, while numerous PCM witnesses-- including Bruntjen, PJIGX's Chairman of the Board of Directors and Mr. Piper himself-- addressed this issue, each of them concentrated on Fund performance. Tr. 1435-36 (Bruntjen), 3083-91, 3096 (Ellis), 4884, 4891, 4898, 4919-20 (Piper). None so much as mentioned preservation of capital. PCM's briefs exhibit the same deficiency. PCM IB at pp.18-19; PCM RB at p. 37. Contrary to PCM's position, Division has not confused PJIGX portfolio management strategy and technique with a deviation from the Fund's stated investment objective. Division merely recognizes that PJIGX portfolio management strategies and techniques promoted the "high level of current income" component of PJIGX's stated investment objective at the expense of the "consistent with preservation of capital" component, thereby subverting the Fund's overall investment objective. The fact that PCM remains unable to recognize this consequence provides enduring testament to PJIGX's disproportionate emphasis on Fund performance throughout the period at issue.

The elements required to hold Goldstein liable for aiding and abetting PJIGX's violation of Section 13(a)(3) are: (1) knowing and substantial assistance in the violation; and (2) general awareness that she was assisting in an improper overall activity. See, e.g., Richard D. Chema, Admin. Proc. 3-8508 at *64-65 (August 24, 1995). Goldstein satisfies neither of these requirements. I found and concluded in Sections II-A(2)(d) and (e), supra, that Goldstein did not substantially participate in formulating or implementing PJIGX investment strategy. I also found and concluded that the record was not dispositive with respect to whether Goldstein was sophisticated enough in the interplay among PJIGX's esoteric risk characteristics to know the Fund's overall investment strategy/portfolio composition had become materially inconsistent with the stated investment objective. It follows that Goldstein may not be held liable for aiding and abetting PJIGX's primary violation of Section 13(a)(3).

D. Possible Violations of Section 17(a) of the Securities Act Based on Weekly Pricing in Calculating the Fund's NAV

OIP Paragraphs X through Z allege that PCM, through Goldstein and others, violated Section 17(a) by falsely stating in PJIGX prospectuses that PCM would calculate a current Fund NAV each business day when, in fact, PCM calculated the Fund's NAV on a weekly basis.

1. Party Positions

(a) Division

Division alleges that PCM and Goldstein violated Section 17(a) by knowingly or recklessly calculating PJIGX's purported NAV each business day using security prices obtained as long as a week before and reporting those NAVs to the Fund's transfer agent for publication. Division generally asserts that daily security pricing is a keystone requirement for any mutual fund. More particularly, Division contends that the Investment Company Act and express PJIGX prospectus language required PCM to compute a current Fund NAV at least once each business day in the absence of specific circumstances. Division claims that PCM knowingly or recklessly ignored this requirement, instead calculating/reporting the Fund's daily NAV based on security prices which were updated only once per week from at least October 1993 through April 1994. Division submits that pricing Fund securities on a weekly basis was even more egregious in light of the facts that: (1) the PJIGX portfolio was dominated by highly volatile CMO derivative securities; and (2) PCM actually reported a Fund NAV which varied from day to day.

(b) PCM

PCM maintains that PJIGX prospectuses accurately reflected the Fund's NAV calculation methodology, and that PCM adhered to that methodology. According to PCM, PJIGX prospectuses did not require daily NAV calculations, and any failure to base the Fund's reported NAV on daily calculations therefore is not necessarily material. PCM maintains that weekly pricing of Fund securities-- whether negligent, reckless or intentional-- cannot constitute a Section 17(a) violation unless: (1) PJIGX reported materially inaccurate NAVs on the intervening days; and (2) Fund shares were purchased or redeemed on those days. PCM contends that Division established neither of these facts, and failed to prove a Section 17(a) violation as a consequence. Insofar as scienter is concerned, PCM maintains that various circumstances belie any fraudulent intent, recklessness or negligence on the Company's part. Principal among these is PCM's contract with an independent security pricing service (Kenny), under which the service billed PCM for daily security pricing, and SEC/auditor approvals of Fund pricing procedures and controls. PCM claims that it reasonably relied on Kenny's apparent compliance with the service's daily pricing obligation, and that the reasonableness of such reliance is demonstrated by the fact that neither the SEC nor the KPMG Peat Marwick review of Fund security pricing disclosed that PJIGX securities were not priced on a daily basis.

(c) Goldstein

Goldstein reiterates PCM's arguments. She also interposes her previous argument that she cannot be held primarily liable under Section 17(a) for any PJIGX prospectus misrepresentation concerning the Fund's NAV calculations because she neither formulated nor made the statements at issue.

2. Findings of Fact/Conclusions of Law

(a) Findings of Fact

CMOs stand in contrast to common stocks and bonds-- which are traded on public exchanges-- in that CMOs are traded only in dealer markets. These markets rely on trader estimates of security prices ("marks")⁶² to assign a value to the securities. It follows that the accuracy of the NAV calculation for any mutual fund whose portfolio includes CMOs necessarily depends on the accuracy of the underlying CMO price estimates.

Like common stock and bond prices, mutual fund NAVs are published in financial periodicals such as the Wall Street Journal on a daily basis. The only meaningful valuation information available to shareholders/potential investors in a mutual fund comprised predominantly of CMOs is the fund's published NAV. It is the primary, if not exclusive, publicly-available criterion on which rational investment decisions may be made.

PJIGX prospectuses issued during the period at issue state:

VALUATION OF SHARES

The Fund determines its net asset value on each day the New York Stock Exchange (the "Exchange") is open for business, provided that the net asset value need not be determined for the Fund on days on which changes in the value of its portfolio securities will not materially affect the current net asset value of the Fund's shares and days when no Fund shares are tendered for redemption and no order for Fund shares is received. The calculation is made as of the primary closing time of the Exchange (currently 4:00 p.m., New York time) after the Fund has declared any applicable dividends.

The net asset value per share for the Fund is determined by dividing the value of the securities owned by the fund plus cash and any other assets (including interest accrued and dividends declared but not collected) less all liabilities by the number of Fund shares outstanding. For the purposes of determining the aggregate net assets of the Fund, cash and receivables will be valued at their face amounts. Interest will be recorded as accrued.

The value of certain fixed income securities will be provided by an independent pricing service, which determines these valuations at a time earlier than the close of the Exchange. Pricing services consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at securities valuations. Occasionally events affecting the value of such securities may occur between the time valuations are determined and the close of the Exchange. If events materially affecting the value of such securities occur during such period, or if the Fund's management determines for any other reason that valuations provided by the pricing service are inaccurate, such securities will be valued at their fair value according to procedures decided upon in good faith by the Company's Board of Directors. In addition, any securities or other assets of the Fund for which market prices are not readily available will be valued at their fair value in accordance with such procedures.

Exh. PCM-22 at pp. PCM-00288-89; Exh. PCM-23 at pp. PCM-00313-14.

PCM formally engaged Kenny to price all securities contained in the PJIGX portfolio by contract dated/effective October 4, 1993. Exh. PCM-582. The contract obligated Kenny to price the Fund's securities on a daily basis. Id. at p. PCM-13359. The record contains substantial evidence that Kenny charged PCM for daily pricing PJIGX portfolio securities from October 1993 through April 1994. Tr. 1573-76, 2682-83; Exh. PCM-62 at p. PCM-01182; Exh. PCM-589. The record also indicates that Kenny transmitted pricing figures for PJIGX portfolio securities to IFTC/PCM⁶³ on a daily basis from October 1993 through April 1994. Tr. 1478-81, 3611.

(b) Threshold Conclusions of Law

The essential elements of a Section 17(a) violation in this context would be a misrepresentation/omission of material fact made in connection with the Fund's daily reported NAV which demonstrates intent to deceive/defraud, recklessness or negligence.⁶⁴ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Aaron v. SEC, 446 U.S. 680, 697 (1980). A misrepresentation would be material if there were a substantial likelihood that a reasonable investor would consider the information important in making an investment decision and would view it as significantly altering the total mix of available information. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, (1976).

The Investment Company Act required PJIGX to use current market values⁶⁵ to determine its current NAV. 17 C.F.R. § 270.22c-1(a). The Investment Company Act, coupled with PJIGX prospectuses covering the period from October 4, 1993 through April 1994, required the Fund to determine its current NAV each day the New York Stock Exchange was open for business, except on days when: (1) changes in portfolio security values would not materially affect the NAV; or (2) no Fund shares were tendered for redemption and no order for Fund shares was received. 17 C.F.R. § 270.22c-1(b)(1)(i), (ii); Exh. PCM-22 at pp. PCM-00288-89; Exh. PCM-23 at pp. PCM-00313-14. Considered together, I find and conclude that the Investment Company Act and PJIGX prospectuses required the Fund to use current market values to determine a current NAV each day the New York Stock Exchange was open for business, with two limited exceptions.

I also find and conclude as a matter of law that Division has satisfied its burden with respect to materiality. The Investment Company Act mandated daily pricing absent one of two limited circumstances. Neither PCM nor Goldstein even attempts to argue that one of those circumstances-- either alone or in combination with the other-- prevailed throughout the seven month period at issue. Moreover, it is difficult to conceive how reasonable investors could fail to consider a daily/weekly security pricing disparity important in their investment decision calculi, or how such investors could fail to view such disparity as a significant alteration of the total mix of available information.⁶⁶ This difficulty is magnified when the Fund's CMO-driven volatility is factored into the mix.

(c) Substantive Analysis and Determinations

1. The Daily Valuation Requirement

It is beyond doubt that PJIGX generally was required to calculate the Fund's NAV on a daily basis from October 4, 1993 through April 1994. The Investment Company Act required it. 17 C.F.R. § 270.22c-1(a). So did Fund prospectuses. Exh. PCM-22 at pp. PCM-00288-89; Exh. PCM-23 at pp. PCM-00313-14. The only exceptions to this requirement were days on which: (1) changes in portfolio security values did not materially affect the NAV; or (2) no Fund shares were tendered for redemption and no order for Fund shares was received. 17 C.F.R. § 270.22c-1(b)(1)(i), (ii); Exh. PCM-22 at pp. PCM-00288-89; Exh. PCM-23 at pp. PCM-00313-14.

PCM emphasizes that the daily pricing requirement was conditional, arguing that the conditional nature of the requirement compels Division to prove in the first instance that the exceptional conditions did not apply. I disagree. The daily pricing requirement was absolute, but excused under two limited circumstances. PCM's argument subtly twists this distinction, treating exceptions as conditions precedent, and thereby placing the exceptions before the rule. Division indisputably bears the initial burden of proof on this issue. That burden, however, was satisfied when Division established that The Investment Company Act and Fund prospectuses generally required PJIGX to calculate the Fund's NAV on a daily basis from October 4, 1993 through April 1994. Insofar as PCM relies on specific exceptions to this requirement, it is incumbent on PCM to demonstrate that the exceptions applied throughout the period at issue.⁶⁷ PCM made no attempt to do so. I therefore find and conclude that no exception(s) to the general daily NAV calculation requirement excused PCM from calculating the Fund's NAV on a daily basis from October 4, 1993 through April 1994.

2. The Kenny Contract

Division concedes that PJIGX reported an ostensibly current NAV every business day throughout the period at issue. Division IB at p. 125; Division RB at p. 112 (citing Exh. DIV-230-A; Tr. 1478). This concession aside, Division maintains that the NAV reported by PJIGX on each business day except Thursday- though varying from the previous day's reported NAV⁶⁸-- was inaccurate/materially misleading because the vast majority of Fund securities (the CMOs) were priced only on Thursdays.⁶⁹ PCM and Goldstein counter that the Kenny securities pricing contract provided adequate basis for a reasonable/good faith belief that all PJIGX securities were being priced on a daily basis.

The record confirms that PCM engaged Kenny to provide daily prices for all securities contained in the PJIGX portfolio effective October 4, 1993. Exh. PCM-582 at pp. PCM-13355, PCM-13359. The record further confirms that Kenny: (1) understood the PJIGX daily pricing requirement (Exh. PCM-567 at p. PCM-13271; Exh. PCM-572 at p. PCM-13288); (2) intended to price all Fund securities on a daily basis (Exh. PCM-1020 at p. 64); (3) invoiced PCM for pricing Fund securities on a daily basis (Tr. 1573-76, 2682-83; Exh. PCM-62 at p. PCM-01182; Exh. PCM-589); and (4) transmitted PJIGX security prices to IFTC/PCM on a daily basis from October 1993 through April 1994. Tr. 1478-81, 3611. Division does not allege that it was inappropriate per se for PCM to out-source the PJIGX security pricing task. Neither does it allege that Kenney was inadequate or incompetent to provide PJIGX security pricing. Indeed, the record indicates that Kenney was a reputable and highly regarded pricing service. Exh. PCM-60 at p. 14; Tr. 4105-06. I therefore find and conclude that it was prima facie reasonable for PJIGX to calculate and report the Fund's daily NAV based on the security prices received from Kenny each business day.⁷⁰

Division contends that the prima facie reasonableness of PJIGX's reliance on Kenny's prices is rebutted by the fact that Goldstein had actual knowledge that Kenney priced most Fund securities on a weekly basis. Division asserts that Goldstein's knowledge is demonstrated by her personal (Thursday) interactions with bond traders on whom she and Bruntjen had directed Kenney to rely for price information, as well as Goldstein statements to third parties and her own sworn testimony. At a minimum, Division submits, Goldstein was reckless in failing to recognize Kenny's daily pricing deficiency because she bore primary responsibility for ensuring that the daily NAV reported to IFTC and the financial press was accurate.

The record contains a troubling amount of evidence consistent with Division's position. It confirms that Kenney secured marks for PJIGX securities only on Thursdays-- and then, primarily from traders whom the Fund had designated and with whom Goldstein and others at PJIGX customarily confirmed security prices on Thursdays.⁷¹ Tr. 827, 835-36, 1246-49, 1255, 1336. The record also indicates that Bruntjen and Goldstein discussed weekly CMO pricing with PCM's Marketing Department and at least one Company broker. Exh. DIV-237 at pp. 92-94; Tr. 684-86. This evidence tends to support a conclusion that PCM and Goldstein actually were aware that Kenney was pricing PJIGX securities on a weekly basis-- at least for a significant part of the period from October 4, 1993 through April 1994.⁷²

Evidence supporting a conclusion that PCM and Goldstein should have been aware that Kenney was pricing PJIGX securities on a weekly basis during the period at issue is even more persuasive. The record confirms that Goldstein bore primary responsibility for ensuring that the daily NAV reported to IFTC and the financial press was accurate. Tr. 382-86 (Goldstein),1390-91 (Bruntjen), 1932 (Destro), 2128 (Johnson). The record also confirms that Goldstein was a highly-competent and detail-oriented professional (Id. at 1380-81 (Bruntjen)) who paid close attention to PJIGX security prices on a daily basis. Id. at 3781, 3786 (Goldstein). This attention included review of the Fund's daily stratification reports. Id. at 386. It therefore seems curious that Goldstein would fail to question why the number of securities appearing on PJIGX's daily stratification reports was, on average, over four times greater on Thursdays than on any other day of the week- again, at least for a significant part of the period at issue. Exh. DIV-232-A. It seems all the more curious in light of the fact that the Thursday security price changes had dramatic composite impacts on the Fund's Thursday NAVs throughout early 1994.⁷³ Exh. DIV-230-A.

As suggestive as the preceding evidence may be, it does not establish that PCM/Goldstein either knew or necessarily were reckless or negligent in failing to recognize that Kenny was not satisfying its contractual obligation to price the Fund's CMO securities on a daily basis. First, the record confirms that PCM's closed-end funds were priced only on Thursdays. Tr. 3619-20. It therefore is understandable that Kidder Peabody traders customarily might provide the bulk of their marks to Kenney and PCM on Thursdays. This also could account for any PCM Marketing Department or broker understandings that Fund CMOs were priced on a weekly basis. Further, Kidder was neither PCM's nor Kenney's exclusive source of PJIGX security marks. The record indicates that PCM directed Kenney to rely on a variety of bond traders for Fund security price information. Assuming, arguendo, that PCM and Goldstein actually knew Kidder provided marks to Kenney only on Thursdays, it does not necessarily follow that they would know Kenney did not secure prices from other sources on intervening business days. I add that it makes no sense for PCM to have tested, contracted and continuously paid for a daily pricing service which it knew it was not receiving. I note, moreover, that various extraneous factors could have influenced PJIGX's pattern of Thursday security price/NAV changes. The record indicates that Thursday was the day on which: (1) weekly Consumer Price Indices were announced; (2) 52 week Treasury bill auctions occurred; and (3) Federal Reserve business surveys were announced. Tr. 2648-49. In combination, these events arguably could have accounted for the Fund's aberrational Thursday security price/NAV changes. On balance, I am compelled to find and conclude that Division has not established by a preponderance of the evidence that PCM/Goldstein knew, or were either reckless or negligent in failing to recognize, that Kenney was not satisfying its contractual obligation to price all PJIGX securities on a daily basis. It follows that PCM/Goldstein may not be held liable under Section 17(a) for any consequent failure to calculate the Fund's NAV on a daily basis.

E. Possible Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Based on Weekly Pricing in Calculating the Fund's NAV

The elements for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder are essentially identical to the elements for alleged violations of Section 17(a) of the Securities Act. Any alleged violation(s) of Section 10(b) and Rule 10b-5 based on weekly pricing in calculating the Fund's NAV therefore are resolved in accordance with the analyses and determinations made in Section II-D of this Initial Decision.

F. Possible Violations of Section 17(a) of the Securities Act Based on Manipulation of the Fund's NAV

OIP Paragraphs AB through AM allege that PCM, Goldstein, Nelson, Johnson and Destro violated Section 17(a) from March 31, 1994 through April 8, 1994 by wilfully manipulating the Fund's NAV in an attempt to disguise PJIGX's actual losses during that period.

1. Party Positions

(a) Division

Division alleges that PCM, Goldstein, Nelson, Johnson and Destro (the "Manipulation Respondents") violated Section 17(a) by participating in a purposeful scheme to manipulate PJIGX's daily NAV from March 31, 1994 through April 8, 1994 to disguise Fund losses. Division maintains that although the actual value of many CMO derivative securities contained in the PJIGX portfolio plummeted as interest rates rose throughout February and March 1994, the Fund's NAV did not reflect these securities' precipitous drops in value. Division asserts that Manipulation Respondents failed to update the prices of a large portion of the Fund's most volatile securities for a period of several months, and panicked when they discovered their failure in late March 1994. Division charges that instead of immediately disclosing the situation to PJIGX's Board of Directors, shareholders and the Commission, Manipulation Respondents artificially propped up the Fund's NAV by selectively overriding appropriate security prices with higher estimates and gradually adjusting the NAV downward over a period of days.⁷⁴

(b) PCM

PCM emphasizes that Division's position on this issue has changed numerous times over the course of the proceeding, vigorously criticizing Division for presenting a "moving target" which is difficult to pin down/address and which also demonstrates the fundamental illegitimacy of any claim that the Fund NAV was manipulated. PCM contends that Division repeatedly has changed its positions with respect to which PJIGX securities were mispriced, which days the mispricing occurred and what the appropriate prices were. The Company submits that these position changes not only undermine Division's claim that Fund security prices were artificially inflated, but also demonstrate the inherent difficulty in assigning precise values to CMO derivative securities under optimal conditions, let alone the market chaos which prevailed from March 31, 1994 through April 8, 1994. PCM further submits that the CMO derivative security valuation process is more art than science. According to PCM, a number of subjective judgments are reflected in trader valuations of such securities, and this fact alone can produce substantial variations among different trader valuations for the same security. The Company maintains that reasonable CMO bids or marks⁷⁵ may vary by more that 20% under normal market conditions-- adding that the range of reasonableness expands under extreme conditions such as dominated the CMO market from February through early April 1994. PCM argues that these facts rebut Division's NAV manipulation allegations because those allegations are premised on the assumption that a security has only one valid price on any particular day. PCM also maintains that the Fund had no incentive to distribute any actual daily NAV decline(s) over a period of six business days.

(c) Goldstein

Goldstein emphasizes that Manipulation Respondents were completely blindsided by the accidental March 31, 1994 discovery that they had been calculating the Fund's NAV- to an indeterminate degree and for an indeterminate period of time-- based on stale security prices being provided by Kenney. And while Goldstein acknowledges she bore primary responsibility for ensuring that PJIGX's daily NAV was accurate, she maintains there is absolutely no basis to hold her responsible for manipulating the Fund's NAV. Goldstein claims she personally was not involved in the March 31, 1994 Fund valuation process, having left the office early that day and only learning there was a problem from Johnson via telephone. This circumstance aside, she maintains that the NAV reported on March 31, 1994 was fairly valued, and that at all times thereafter she and the other Manipulation Respondents did everything in their power to ensure that the Fund's NAV was calculated and reported as accurately as possible. Goldstein challenges as ill-motivated Division witness Marcy Winson's testimony that Winson, Goldstein, Bruntjen, Nelson, Johnson and Destro variously conspired to ratchet down the NAV over a period of days on April 4, 1994, underscoring the fact that PJIGX reported an unprecedented $0.30 NAV decline that very day.

(d) Johnson

Johnson principally stresses her work ethic, character and integrity, adding that she had absolutely no incentive to manipulate the Fund NAV. She characterizes her role in the portfolio pricing process as entirely administrative and ministerial, distinguishing it from that of portfolio managers charged with ensuring security price accuracy. Johnson emphasizes that she did not have the expertise, responsibility or authority to evaluate security prices. Johnson also points out that she customarily spent only five minutes per day on pricing duties, and even these few minutes were not devoted exclusively to PJIGX. She maintains that once the stale pricing problem was discovered, she and the other Manipulation Respondents made every good faith effort to ensure that the Fund's NAV immediately was corrected, and reported as accurately as possible on subsequent days. She challenges the allegation that she participated in an NAV ratcheting conspiracy as factually impossible and self-serving on Winson's account.

(e) Destro

Destro adopts PCM's position on this issue in its entirety. In addition, Destro also maintains that she did not have the expertise, responsibility or authority to evaluate security prices. She notes that she worked as an accounting manager in the PCM operations department, the only security pricing aspect of which was acting as an information conduit between Company portfolio managers and IFTC. She vigorously disputes that any conspiracy to smooth security prices or to ratchet down the Fund NAV ever occurred, maintaining instead that she, Johnson and Nelson took every appropriate step to ensure that accurate security prices were used to calculate the Fund's NAV immediately and continuously after the stale security prices were discovered. Destro dismisses various tape recorded statements made by her in the midst of the pricing crisis suggesting manipulation culpability as gallows humor, emphasizing those statements' inconsistency with her April 4, 1994 tape recorded instruction to IFTC to incorporate PJIGX's total composite security price drop into the NAV published for the Fund on April 4, 1994.

(f) Nelson

Nelson argues that the record is virtually devoid of evidence linking him to the factual events at issue, let alone any corollary conspiracy to manipulate the Fund NAV. Nelson stresses that the OIP charges him with affirmative participation in a scheme to manipulate the NAV rather than a failure to supervise the Fund's pricing/valuation process. Nelson claims that any manipulation conspiracy allegations against him are based exclusively on discredited testimony, and that all credible evidence conclusively establishes that his participation in the events at issue was confined to his instruction to incorporate PJIGX's total composite security price drop into the Fund's April 4, 1994 NAV-- an instruction which he emphasizes resulted in the largest one day NAV decline in PJIGX's history.

2. Findings of Fact/Conclusions of Law

(a) Findings of Fact

As explained in Section II-D, supra, CMOs are traded in broker-dealer markets which rely primarily on trader marks to assign appropriate values to the securities. As a consequence, the accuracy of the NAV calculation for any mutual fund whose portfolio includes CMOs necessarily depends on the accuracy of the underlying marks. PCM formally engaged Kenny to price all securities contained in the PJIGX portfolio by contract dated and effective October 4, 1993. Exh. PCM-582. The contract obligated Kenny to price the Fund's securities on a daily basis. Id. at p. PCM-13359. Kenny ostensibly secured trader marks for PJIGX portfolio CMOs on a daily basis, and daily transmitted those quotes to IFTC, from October 1993 through April 1994. Tr. 1478-81, 3611. IFTC processed the Kenney information, then transmitted initial pricing reports to PCM. Id. at 1479-80, 4508-10. The reports reflected prices for each of PJIGX's individual securities, as well as an interim NAV calculation based on those prices. Id. at 4508-09. IFTC also transmitted a daily stratification report highlighting Fund securities with significant price changes or missing prices. Id. PCM Operations Department personnel worked directly with Kenny and individual traders to correct suspected pricing errors and to obtain any missing security prices. Id. at 3626, 4513, 4522-26. IFTC finalized its daily reports to PCM only after a PJIGX portfolio manager approved an NAV based on the manager's independent review/confirmation of all Fund security prices. Id. at 4516-21. IFTC then reported the Fund-approved NAV to NASDAQ for next morning newspaper publication. Id. at 4511-12.

PCM's participation in the daily NAV valuation process customarily occurred over a short period of time. IFTC did not receive Kenney's security price information until approximately 3:00 p.m. each afternoon. Id. at 1479, 1556, 4511. IFTC took until approximately 4:00 p.m. to process the Kenney information and transmit initial pricing/stratification reports to PCM. Id. at 1482, 1557, 4511. PCM then had until 4:30 p.m. to review/confirm all PJIGX security prices and approve an NAV for IFTC transmission to NASDAQ. Id. at 1560-63, 4511-12. In the event PCM failed to meet the 4:30 p.m. deadline, the Fund's NAV would not be published in newspapers the following morning. Id. at 1562-63, 4511-12. PCM nevertheless would attempt to verify the Fund's NAV to IFTC by the transfer agent deadline of 7:00 p.m. so that IFTC could process the day's transactions. Id. at 1562-63, 4530-33.

The PCM Operations Department printed IFTC's initial pricing and stratification reports for as many as 19 open-end funds managed by PCM-- including PJIGX-- at approximately 4:00 p.m. each business day. Id. at 4512. The number of IFTC reports doubled on Thursdays, when PCM also valued its closed-end funds. Id. The Operations Department performed a cursory review of all reports, but focused on the 19-38 stratification reports because those reports highlighted securities which had not been priced, as well as securities which were likely to reflect obvious pricing errors. Id. at 4512-13. Between approximately 4:00 p.m. and 4:15 p.m., PCM operations personnel worked directly with IFTC, Kenney and individual traders to secure/confirm/correct stratification report prices and determine the various funds' indicated NAVs. Id. at 3626-27, 4513. Corrected IFTC reports usually were hand delivered to portfolio managers for review and approval no later than 4:20 p.m. each day. Id. at 3624-26, 4518-20, 4526. Although this sequence of events seems inordinately truncated, the record confirms that PCM was adequately staffed and had adequate time to perform its daily NAV valuation process-- even on Thursdays-- under normal circumstances. Id. at 4728.

March 31, 1994, was not a normal valuation day at PCM by any measure. It was a Thursday, so all 38 funds had to be valued. Id. at 4512. More important, Winson and Destro accidentally discovered in the morning that Kenney had been providing stale prices on an indeterminate number of PJIGX securities for a significant period of time. Id. at 1932, 1935, 4546-47. Destro, Johnson and Winson immediately devoted their efforts to determining the extent of the pricing deficiency and correcting it. Id. at 4229, 4547-48. Several hours of intensive efforts later, Destro and Johnson had determined that a minimum of "several dozen" Fund securities probably were implicated.⁷⁶ Id. at 4549. Destro immediately conveyed the situation to Nelson, and later to Goldstein. Id. at 1934-36. While the extent of their involvement in the process varied, Destro, Johnson and Winson attempted to determine the suspect securities' current prices by various means throughout the day and into the evening, missing both the 4:30 p.m. NASDAQ publication deadline and the 7:00 p.m. transfer agent deadline.⁷⁷ Id. at 1933-34, 1939-41, 4551-53. Efforts to secure accurate prices through Kenney and individual traders increasingly were frustrated as the hours passed by the fact that the markets were closed the following day in observance of Good Friday and traders were unavailable. Id. at 1502, 1681, 4550; Exh. PCM-508 at p. PCM-10789. The single (Kidder Peabody) trader from whom Winson was able to secure prices could not mark all of the suspect securities, and provided what she considered to be unjustifiable/unreasonably low marks on the others. Tr. at 1682-83. Winson therefore relied on "fair valuation," utilizing PCM's internal Bloomberg analytic system to derive prices for the securities. Id. at 1683, 4550. In the meantime, Johnson pleaded for and received an extension of the 7:00 p.m. transfer agent deadline from IFTC. Id. at 4551. The extension was an extraordinary accommodation because it delayed IFTC from processing the day's transactions for all brokerages using IFTC as their transfer agent. Id. at 4531. Johnson then assisted Winson by recalculating the Fund's NAV each time Winson derived another security's price on the Bloomberg system so that the NAV would be available for portfolio manager review/approval almost immediately after Winson completed her fair valuation process. Id. at 2552, 4552-53. At approximately 8:00 p.m., IFTC informed Johnson that it could wait no longer. Id. at 4557. Winson immediately finished her fair valuation, and either she or Goldstein orally approved the resulting NAV,⁷⁸ which Johnson relayed to IFTC. Id. at 4558.

Neither was March 31, 1994 a normal day in the CMO securities market. As previously detailed, the Federal Reserve Board initiated a series of interest rate increases early in 1994. These increases negatively impacted CMO security values, and funds holding the securities suffered significant losses. The losses caused concomitant sell-offs, further depressing values as CMO securities flooded the market.⁷⁹ The record indicates that these circumstances alone made PCM's daily valuation process more difficult and time consuming than normal throughout February and March 1994. Exh. PCM-60 at pp. 13-14; Tr. 4541-44. PCM's daily valuation process turned exceedingly difficult and time consuming when, on March 30, 1994, Askin⁸⁰ defaulted on broker-dealer margin calls and the traders immediately liquidated several hundred million dollars in CMOs from Askin's funds. Exh. PCM-743 at pp. PCM-14985-94; Tr. 1680-84, 1745, 3714, 4542-44. In fact, March 31, 1994 was the first day of what generally is acknowledged as an Askin-precipitated "crash" in the CMO securities market, and Winson expressly attributed the difficulty in securing appropriate marks for the stale-priced securities to the Askin liquidation in a note she drafted that night to explain the need for fair valuation. Exh. PCM-144 at p. PCM-02214.

CMO market saturation and volatility continued to complicate PCM's valuation process throughout the week of April 4, 1994.⁸¹ Lack of liquidity combined with broker-dealer opportunism to depress CMO security prices.⁸² This price drop necessarily impacted broker-dealer bids and marks. Tr. 868. Winson managed to secure broker-dealer marks for PJIGX's stale-priced securities early on the morning of April 4, 1994. Id. at 4185, 4653; Exh. PCM-640. Those marks indicated precipitous price drops from the figures Winson had derived for the securities on March 31, 1994. Tr. at 4186; Exh. DIV-186; Exh. PCM-640. Winson and PJIGX's other portfolio managers, however, were concerned that the marks did not reflect accurate values for the securities. Tr. 4185-86, 4626-28. Someone-- allegedly Winson-- therefore proposed gradually to reduce the stale-priced security values over a few days, the objective being to secure additional time for PCM to confirm the securities' appropriate market values. Id. at 4186, 4628. The record contains contradictory evidence with respect to whether the proposal was implemented. Winson claims it was; Goldstein, Destro, Johnson and Nelson maintain it was not. Whatever the case, PCM reduced the values of approximately half of PJIGX's securities on April 4, 1994, resulting in an unprecedented $0.30 per share drop in the Fund's NAV from March 31, 1994. Compare Exh. PCM-547 with Exh. PCM-546. The CMO derivative security market rallied somewhat on April 5, 1994, but PJIGX portfolio security price fluctuations continued to complicate PCM's efforts to determine accurate security values. Although PJIGX's April 5, 1994 stratification report indicated significant price changes in 33 securities (Exh. PCM-491 at pp. PCM-07000-010), the Fund's reported NAV stayed constant at the April 4, 1994 level of $10.10 per share. In the midst of continued market turmoil on April 6, 1994, PJIGX's reported NAV remained at $10.10 per share for a third straight day. The ten year Treasury Bill Index dropped further on Thursday, April 7, 1994 (Exh. PCM-65), and 100 securities appeared on PJIGX's daily stratification report. Exh. PCM-491 at pp. PCM-07003-08. PJIGX again missed the 4:30 p.m. NASDAQ publication deadline, reporting a Fund NAV of $9.87 per share to IFTC at approximately 7:15 p.m. Exh. DIV-151; Exh. DIV-230-A. PJIGX reported a Fund NAV of $9.80 per share to NASDAQ and IFTC on April 8, 1994. Exh. DIV-153.

Johnson was out of the office attending a professional seminar from approximately 12:00 p.m. on April 4, 1994 until the morning of April 6, 1994 and did not participate in the Fund valuation process during that period. Tr. 4625-26; Exh. PCM-510. Destro was out of the office the entire days of April 7, 1994 and April 8, 1994, and did not participate in the Fund valuation process during that period. Tr. 4198-99; Exh. PCM-501. Nelson left the office the afternoon of April 6, 1994, did not return until at least the afternoon of April 8, 1994, and did not participate in the Fund valuation process during that period. Tr. 3899-3900; Exh. PCM-519. Goldstein participated in the PJIGX valuation process and approved the final Fund NAV each day from April 4, 1994 through April 8, 1994.

(b) Threshold Conclusions of Law

Division does not specifically allege that Manipulation Respondents' failure to discover the stale-priced security problem prior to March 31, 1994 violated Section 17(a). Nevertheless, I deem it advisable at the outset expressly to rule that it did not. The record confirms that Kenney was a reputable/highly regarded pricing service (Exh. PCM-60 at p. 14; Tr. 4105-06) on whose quotes it was prima facie reasonable for PJIGX to rely. The record, moreover, is devoid of evidence that any of Manipulation Respondents either knew or reasonably should have known that Kenney was providing stale prices prior to March 31, 1994.

The essential elements of a Section 17(a) violation in this context would be a manipulation/ misrepresentation of material fact- the Fund's daily NAV- made in connection with the offer, sale or purchase of PJIGX securities which demonstrates intent to deceive/defraud or recklessness.⁸³ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Aaron v. SEC, 446 U.S. 680, 697 (1980). The manipulation/misrepresentation would be material if there were a substantial likelihood that a reasonable investor would consider an accurate daily NAV important in making an investment decision and would view the NAV as significantly altering the total mix of available information. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, (1976).

As determined in Section II-D, supra, the Investment Company Act required PJIGX to use current market values to determine its daily NAV. 17 C.F.R. § 270.22c-1(a). The Investment Company Act, coupled with the PJIGX prospectus covering the period from March 31, 1994 through April 8, 1994, required the Fund to determine its current NAV each day the New York Stock Exchange was open for business, except on days when: (1) changes in portfolio security values would not materially affect the NAV; or (2) no Fund shares were tendered for redemption and no order for Fund shares was received. 17 C.F.R. § 270.22c-1(b)(1)(i), (ii); Exh. PCM-23 at pp. PCM-00313-14. None of Manipulation Respondents claims that either of these exceptions applies. I therefore find and conclude that the Investment Company Act and the February 1, 1994 PJIGX prospectus required Manipulation Respondents to use the current market values of all portfolio securities to determine the Fund NAV on March 31, 1994 and from April 4, 1994 through April 8, 1994. I further find and conclude that any reasonable investor would consider an artificially inflated NAV important in the investment decision calculus and would view such an NAV as a significant alteration of the total mix of available information. The published NAV constitutes any fund's primary valuation information. It follows as a matter of law that Division has satisfied its burden with respect to materiality.⁸⁴

Division also has satisfied its burden with respect to scienter-- provided Division can establish the act of NAV manipulation. Contrary to Manipulation Respondents' position, Division is not compelled to establish what motivated Manipulation Respondents to manipulate the NAV if Division can establish affirmative manipulation. What is at issue is the fraudulent conduct itself, not its motivation.⁸⁵ See, e.g., SEC v. U.S. Environmental, Inc., 155 F.3d 107, 111-12 (2d Cir. 1998), cert. denied sub nom. Romano v. SEC, 526 U.S. 1111 (1999).

(c) Substantive Analysis and Determinations

1. Valuation Range

To review yet again, securities like common stocks and bonds are traded on public exchanges which assign values in accordance with actual market transactions. A publicly-traded security's precise value may be determined at any point in time by simple reference to its current market price. All market participants generally accept this price as the security's actual value. CMOs, by contrast, are traded only in broker-dealer markets. These markets rely on trader estimates of current security values to price the securities. To a significant degree, CMO valuation and pricing rely on broker-dealer expertise and familiarity with current market information, conditions, transactions and other developments. This expertise/familiarity varies from one broker-dealer to another, as does the relative weight each broker-dealer assigns to the various components of the valuation calculus. It follows that the reasonable value of a CMO- while determined in accordance with objective criteria-- cannot be fixed as precisely as the reasonable value of a publicly-traded security. Exh PCM-743 at pp. 13-14.

The record confirms that broker-dealers reasonably may come to varying conclusions with respect to the exact value of a CMO security at any given point in time. Exh. PCM-60 at p. PCM-01121; Exh. PCM-743 at p. 182. Different broker-dealers therefore typically mark a particular security across some range of prices. Exh. PCM-60 at pp.10-14; Exh. PCM-558 at p. PCM-13134. The range may be a function of the various broker-dealers' analytic assessments of underlying security characteristics (e.g., prepayment speed/forward yield curve assumptions), derivative type-specific/security-specific familiarity or expertise, particularized awareness of current market transactions or conditions (e.g., creation values⁸⁶), subjective judgments, or some combination of these and other factors. Exh. PCM-743 at pp. 18-20. The record indicates that the range among security marks typically expands to some degree in times of market turmoil. Exh. PCM-60 at pp. 13-14.

Manipulation Respondents maintain that reasonable CMO valuations vary by 20% or more under normal market conditions. They also maintain that the reasonable CMO valuation range widened during the bond market crash precipitated by the March 30, 1994 Askin liquidation, arguing that the vast majority of the 175 security prices at issue fall within 30% of the prices Division alleges should have been used to calculate the Fund's NAV between March 31, 1994 and April 8, 1994. Manipulation Respondents submit that these circumstances demonstrate that the prices PJIGX used to calculate the Fund NAV were reasonable, and in themselves rebut any Division allegation that the NAV was artificially maintained. I disagree. Manipulation Respondents' position on this issue relies on mischaracterization of record evidence combined with adroit invocation of the term "value." First, the record evidence which Manipulation Respondents cite to support their contention that reasonable CMO valuations may vary by 20% or more under normal market conditions applies primarily to the ask/bid "spreads" between seller/purchaser security valuations. See, e.g., Tr. 1799; Exh. PCM-60 at pp. 11-13.⁸⁷ As previously discussed, broker-dealer marks must be distinguished from both ask and bid prices. An "ask" price is the amount a security holder actually is willing to accept for a security; a "bid" price is the amount a potential purchaser actually is willing to pay for the security-- which may be substantially less than the ask price. The ask/bid differential ("spread") therefore constitutes a range of potential transaction prices. A mark is a broker-dealer estimate of the exact point within the range of potential prices where a transaction is most likely to occur. Consequently, appropriate marks for any particular security necessarily would fall within that security's contemporaneous ask/bid spreads- ideally at their mid-points. Accord Tr. 829. It follows that while marks provided by different broker-dealers for the same security will vary over some limited range due to the traders' different assessments of where within the ask/bid price spread the security actually should trade, the range among marks will be much more narrow than the ask/bid spreads from which they are extrapolated. Manipulation Respondents' deft interchange of the terms "price" and "value" misleadingly obscures this fact. Second, the balance of record evidence which Manipulation Respondents cite to support their contention that reasonable CMO valuations may vary by 20% or more under normal market conditions concerns price differentials produced by the application of fundamentally different pricing methodologies. Exh. PCM-743 at pp. 19-20. Here, it is beyond dispute that Kenney and PCM predominately utilized a single methodology, whereby marks were secured directly from traders relying on intimate knowledge of contemporaneous market conditions/transactions-- primarily from the very broker-dealer (Kidder Peabody) who sold PCM the majority of the Fund's CMO derivative securities. Tr. 1926, 2126-27, 3787-89, 3934; Exh. PCM-567.

I find and conclude that appropriate CMO derivative security marks typically vary over some limited range due to different trader assessments of the price at which the security actually will trade at a particular point in time, and that this range expands to some degree in times of market turmoil. I nevertheless reject Manipulation Respondents' contention that legitimate CMO security marks typically vary by 20% or more under normal market conditions. And while I accept Manipulation Respondents' general proposition that the reasonable range for CMO derivative security marks expanded during the March 31, 1994 through April 8, 1994 period at issue, I reject their corollary contentions that: (1) the reasonable range expanded to 30%; or (2) this indeterminate expanded range establishes that the prices PJIGX used to calculate the Fund NAV were reasonable, and in itself rebuts Division's allegation that the NAV was artificially maintained.

2. PJIGX Valuation Methodology/Implementation

The valuation methodology approved by PCM's Board of Directors for PJIGX is contained in a document designated "VALUATION PROCEDURES AND POLICIES." Exh. PCM-552. That document indicates that PJIGX generally would utilize an outside pricing service to value Fund portfolio securities and would rely on the pricing service valuations to determine the Fund's NAV. Id. at p. PCM-13098. The document also anticipates that PJIGX's outside pricing service regularly would be unable to value certain securities, and sometimes would value a security "at a substantially different level than its actual market value." Id. It therefore specifies a methodology for PCM to make good faith security value determinations in the limited circumstance that market prices were "not readily available." Id. The specified methodology is:

[To] value the security at the average of the highest current independent bid price and the lowest current independent asked price determined on the basis of reasonable inquiry. Such reasonable inquiry may include obtaining bid and asked prices from a recognized, reputable broker-dealer making a market in such security or asset, or obtaining such prices from a widely used quotation system such as Bloomberg or, with respect to foreign securities, Reuters.

Id.

PCM formally engaged Kenny to price all securities contained in the PJIGX portfolio by contract dated and effective October 4, 1993. Exh. PCM-582. Kenney performed "directed pricing" under the contract, securing PJIGX security marks principally from broker-dealers designated by PCM because the Company originally had purchased the securities from those traders. Tr. 1926, 2126-27, 3787-89, 3934; Exh. PCM-567. The primary source of PJIGX security marks among the designated broker-dealers was, by far, Kidder Peabody. Tr. 378, 1926, 2127, 3788. The record indicates that Kidder Peabody transmitted its PJIGX security marks directly to PCM in addition to Kenney during the March 31, 1994 through April 8, 1994 period at issue. Id. at 387-88, 1255-56. Kenney electronically transmitted the marks it had secured for the Fund's securities to IFTC each day at approximately 3:00 p.m. Id. at 1478-81, 3611. IFTC used these prices to compile the daily initial pricing/stratification reports (including interim NAVs) which IFTC transmitted to PCM at approximately 4:00 p.m.

Operations Department personnel checked PJIGX's daily initial pricing/stratification reports for missing prices and other obvious errors, and worked directly with Kenny and individual traders to secure/correct them prior to portfolio manager review. Id. at 3626, 4513. Corrected initial pricing/stratification reports were then hand delivered for portfolio manager review and approval. Id. at 3624-26, 4518-20, 4526. The portfolio manager focused primarily on the stratification report, first correcting obvious errors such as transposed numerals or misplaced decimal points. Id. at 3626-27. She then concentrated on any unusual or unexpected price changes, which entailed at least a cursory examination of each security remaining on the stratification report. Id. at 3627-30, 4519-20. Prices deemed unreasonable by the portfolio manager were subject to override under appropriate circumstances. Actual price overrides customarily were the result of direct discussions between the portfolio manager and the pricing source, whether Kenney or the broker-dealer(s) who had provided the suspect prices to Kenney. Id. at 1927, 4526-28. If the pricing source agreed to revise the challenged price to a price that the portfolio manager considered reasonable, the revised price was used to calculate the NAV. If the pricing source did not revise the challenged price, the portfolio manager either: (1) accepted the source's original quote; (2) sought quotes from different traders; or (3) resorted to Bloomberg system analytics to extrapolate a reasonable price for the security. Id. at 1928, 4528-29; Exh. PCM-549; Exh. PCM-558 at p. PCM-13126. The record establishes that using Bloomberg analytics to fair value PJIGX securities was a last resort, and it was exceedingly rare to rely on security prices derived through Bloomberg system analyses to determine the Fund's NAV. Id. at 392-93, 1928, 2141-42, 3952-53.

The record confirms that Goldstein bore primary responsibility for PJIGX's daily portfolio manager review. Id. at 386, 2128, 3947. In the event Goldstein (or Winson) elected to override a price received from IFTC, she would delegate either Destro or Johnson⁸⁸ to instruct IFTC to substitute whatever price the portfolio manager indicated was appropriate. Id. at 1482-83, 1492, 2131-32. The record establishes that the PJIGX portfolio manager physically was present in the PCM Operations Department during the security price override process throughout the period at issue. Id. at 2132-35. The record also establishes that the portfolio manager was required to explain the basis for any security price override to the Operations Department individual whom the portfolio manager instructed to convey the override to IFTC before the override was conveyed.⁸⁹ Id. at 2152-54, 3870-72; Exh. PCM-920. It was not IFTC's role independently to evaluate or verify any security price information provided by PCM. Tr. 1493-94, 1611-12.

As a general matter, I find and conclude that PCM's valuation methodology/implementation for PJIGX in no way violates Section 17(a). The preceding discussion demonstrates that the Company established and implemented detailed valuation procedures and policies for PJIGX, and that those procedures and policies were in effect throughout the period at issue. The record confirms that PCM's Board of Directors approved the valuation methodology reflected in the document designated "VALUATION PROCEDURES AND POLICIES" for the Fund on April 22, 1993. Exh. PCM-552 at p. 3. The record also confirms that those procedures and policies were referenced in the pertinent Fund prospectus. Exh. PCM-23 at p. PCM-00314. Division has not established that the policies and procedures were inadequate, and the record indicates the contrary. In this instance, moreover, it is entirely appropriate for PCM to rely on the KPMG Peat Marwick/SEC conclusions that the Company established and implemented appropriate valuation procedures and practices for the Fund. See Exh. PCM-380 at p. PCM-05890; Exh. PCM-919 at pp. PCM-16717-19, PCM-16744-46. It is noteworthy that PCM's written valuation procedures/practices specifically anticipated PJIGX's outside pricing service regularly would be unable to value certain securities, and sometimes might price Fund securities at odds with actual market values, therefore specifying a methodology for PCM to make good faith security value determinations.⁹⁰ But while that methodology contemplated resort to Bloomberg analytics, such resort was expressly limited to circumstances in which market prices were "not readily available." Id. It follows that any specific security price overrides implemented by PCM had to be based in the first instance on actual market quotes from alternate broker-dealers, and on Bloomberg extrapolations only insofar as such alternate market quotes were not readily available.

3. March 31, 1994 - April 8, 1994

The parties have presented copious evidence concerning the pricing of 175 discrete securities over six different days. They dedicate substantial portions of their weighty post-hearing briefs to detailed security-by-security exposition and argument. I have reviewed and analyzed the evidence and arguments with extreme care and in minute detail. That review and analysis, however, compels me to conclude it is virtually impossible to determine with certainty whether many of the securities at issue actually were mispriced and, if so, specifically when the mispricing occurred.⁹¹ Nor is it necessary to do so. Lest we lose the forest for the trees, what is at issue here is whether Manipulation Respondents, or any of them, purposefully attempted to manipulate the Fund NAV. Either they did or they did not. Division either proved it or Division did not. If intentional or reckless security price/NAV manipulation took place, it matters only incidentally what specific securities were involved, on what day(s) they actually were mispriced, or even whether/to what degree the mispricing impacted PJIGX's reported NAV. Moreover, identifying mispriced securities provides only indirect evidence of underlying intentional or reckless manipulative behavior-- evidence which, in itself, would provide inadequate basis to hold Manipulation Respondents liable pursuant to Section 17(a). This problem is exacerbated by the fact that reasonable CMO derivative security prices naturally vary across an indeterminate range. As a consequence, I find and conclude it will be more fruitful to concentrate on evidence suggesting manipulation in general, referencing specific securities and prices only when instructive with respect to the activity at issue.

March 31, 1994:

It is difficult to conceive how Manipulation Respondents better could have handled the circumstances which confronted them on March 31, 1994. Division apparently does not contend that Manipulation Respondents' failure to discover the stale-priced security problem prior to March 31, 1994 constitutes a Section 17(a) violation and, in any event, I specifically have ruled that it does not. Although the stale-priced security problem alone severely would have taxed Manipulation Respondents' ability to determine an accurate NAV for PJIGX on March 31, 1994, their valuation challenges that day were not confined to that problem. It was a Thursday-- meaning all 38 funds had to be valued. Tr. at 4512. More important, it was a Thursday prior to an extended holiday weekend on which the markets were closed the following day in observance of Good Friday, limiting Manipulation Respondents' ability to secure current market quotes from broker-dealers. Id. at 1502, 1681, 4550; Exh. PCM-508 at p. PCM-10789. Circumstances were compounded by the preceding day's Askin default/liquidation, which also impacted broker-dealer quote availability and apparent accuracy. Exh. PCM-743 at pp. PCM-14985-94; Tr. 1680-84, 1745, 3714, 4542-44.

The record indicates that while Winson was able to secure marks for most of the stale-priced securities from Kidder Peabody late Thursday afternoon, Kidder could not mark all of the stale-priced securities, and provided what Winson considered to be unjustifiable/unreasonably low marks on the others. Tr. at 1675-77, 1681-83; Exh. DIV-157. The record also indicates that Winson was unable to secure alternate broker-dealer marks for the securities. Tr. 1682, 1745, 4550. Winson therefore resorted to PCM's internal Bloomberg analytic system to fair value the securities. Id. at 1683, 4550.

I find and conclude that the preceding actions were entirely consistent with the valuation methodology prescribed in the document designated "VALUATION PROCEDURES AND POLICIES" and the applicable Fund prospectus. PJIGX's valuation procedures/policies and prospectus indicate that the Fund generally would utilize an outside pricing service to value PJIGX portfolio securities and would rely on the pricing service valuations to determine the Fund's NAV. Exh. PCM-552 at p. PCM-13098; Exh. PCM-23 at p. PCM-00314. PCM fulfilled this requirement by engaging Kenney and generally relying on the prices Kenney provided to determine the Fund NAV. On March 31, 1994, however, Winson, Johnson and Destro discovered that Kenney's prices for several dozen Fund securities were stale, and therefore unreliable. They properly did not rely on the stale prices, instead attempting to secure alternate quotes. When such quotes proved not readily available or otherwise appeared to deviate substantially from actual market values, Winson resorted to PCM's internal Bloomberg analytic system in a good faith attempt to price the securities using the only valid means available to her.⁹² This procedure precisely mirrors PJIGX's formal valuation policy. I therefore find and conclude that no security price/NAV manipulation occurred on March 31, 1994.

April 4, 1994:

The most problematic day at issue is April 4, 1994. Winson maintains this is the day that she, Bruntjen, Goldstein, Destro, Johnson and Nelson first conspired to ratchet down the Fund NAV over a period of days to disguise the magnitude of PJIGX's March 31, 1994 losses. Manipulation Respondents acknowledge that Winson floated a proposal gradually to reduce the stale-priced security values over a few days, but are adamant that Winson's proposal unequivocally was rejected.

The record establishes that Winson managed to secure broker-dealer marks for PJIGX's stale-priced securities early on the morning of April 4, 1994. Tr. 4185, 4653; Exh. PCM-640. Those marks indicated precipitous price drops from the figures Winson derived for the securities on March 31, 1994. Tr. 4186; Exh. DIV-186; Exh. PCM-640. The record indicates that Winson and PJIGX's other portfolio managers were concerned that the marks did not reflect accurate values for the securities (Tr. 4185-86, 4626-28), and someone- allegedly Winson-- therefore proposed gradually to reduce the stale-priced security values over a few days, the objective being to secure additional time for PCM to confirm the securities' appropriate market values. Id. at 4186, 4628. The record evidence becomes contradictory at this point. Winson's testimony and supporting evidence indicates that Manipulation Respondents agreed and acted to implement the proposal. Nelson, Destro, Johnson and Goldstein testimony and supporting evidence indicates that Manipulation Respondents unequivocally rejected the proposal.

The bulk of evidence on this issue consists of conflicting testimony between Winson on the one hand and Nelson, Destro and Johnson on the other. Since none of these witnesses exhibited any discernible lack of credibility at hearing,⁹³ the weight of testimonial evidence favors Manipulation Respondents' position. This circumstance, however, could be attributable exclusively to the conspiratorial nature of the charge against them. Accordingly, I find and conclude that the conflicting testimonial evidence on this issue should be given equal weight, and the issue must be decided based on a comparative analysis of the evidence supporting the conflicting testimony.

Turning back to the undisputed record, the broker-dealer prices Winson secured for PJIGX's stale-priced securities on the morning of April 4, 1994 approximated the marks Kidder Peabody had provided on March 31, 1994 and were substantially lower than the values Winson had derived for the securities that preceding Thursday.⁹⁴ Exh. DIV-186; Exh. PCM-640; Tr. 1708, 4186. According to Winson, she personally informed Bruntjen, Goldstein, Johnson and Destro that the market would not substantiate the prices used on March 31, 1994, but everyone balked at the Fund absorbing the preceding Thursday's losses all at once.⁹⁵ Tr. 1746-47. She claims instead that a general consensus emerged over the course of April 4, 1994 gradually to incorporate the losses over the intervening days before the next comprehensive fund pricing Thursday-- April 7, 1994. Id. at 1747. On Winson's account, it was agreed that she would implement the plan for the Manager's Fund⁹⁶ and Goldstein would implement it for PJIGX. Id. at 1748. And while Manipulation Respondents dispute Winson's account, one of the scarce pieces of documentary evidence on this issue accords with it. The pricing sheet which Winson created to secure the stale-priced securities' current marks for April 4, 1994 (Tr. 1711) incorporates three columns designated "New Price", "Old Price" and "Change" with values typed into the columns for each of the stale-priced securities. Exh. DIV-186.⁹⁷ This document also reflects the following handwritten notations:

Managers (ratchet by ½) Marcy will take care of

Our funds

over 4 days if moved on Thurs

over 3 days if no on Thurs

Id. at p. DIV-02345. Johnson acknowledges that the notations are hers and that the delta signs represent the word "change." Tr. 2191-93, 4630. She nevertheless denies any recollection of the notations' underlying meaning/purpose, or that they reflect what actually was done with respect to the Fund's securities or NAV. Id. at 2192-95, 4629-30. Johnson emphasizes that Winson alleges the manipulation scheme coalesced/was implemented on the afternoon of April 4th and throughout the day on April 5th. Id. at 1746-51, 1804, 2370-71. Johnson underscores the facts that she indisputably left the office to attend a professional seminar in New York City at approximately 12:00 p.m. on April 4th, did not return until the morning of April 6th, and consequently could not possibly have participated in the manipulation scheme as Winson alleges. Id. at 4625-26; Exh. PCM-510. These circumstances apart, Manipulation Respondents all highlight the fact that Johnson and Destro each independently indicated to IFTC that PJIGX wanted the Fund NAV to absorb all the security price changes reflected on Exh. DIV-186 on April 4, 1994, maintaining that this fact cannot be reconciled with any alleged scheme gradually to ratchet down the Fund's security prices/NAV over a period of days.

The record confirms that Johnson made the following statement to IFTC at approximately 10:30 a.m. on April 4th in specific reference to the Exh. DIV-186 price changes: "We would like to just slam all these things through today." Exh. PCM-984, Tab 19 at p. 2. The record also confirms that Destro made the following statement to IFTC at approximately 2:00 p.m. on April 4th in specific reference to those price changes: "Okay, here's the deal. We want to take that full hit on [PJIGX]." Id., Tab 21 at p. 1. Moreover, it is undisputed that PCM/IFTC actually used 34 of the 40 values reflected in Exh. DIV-186's "New Price" column to determine the NAV that PJIGX reported on April 4th, and that these and other portfolio security price reductions combined to produce an unprecedented $0.30 per share drop in the Fund's NAV compared to March 31, 1994. These facts all support a conclusion that there was no scheme to disguise the Fund's March 31, 1994 losses by gradually ratcheting down the Fund's security prices/NAV over a period of days. It is clear, however, that they do not present a complete picture. The purpose of Johnson's 10:30 a.m. conversation with IFTC was not actually to instruct IFTC to "slam . . .through" the Exh. DIV-186 price changes; it was to determine the NAV implications of doing so. Johnson explains: "What I'm trying to figure out is, how much of a hit would we have to NAV if we just took everything right down to the new price?" Exh. PCM-984, Tab 19 at p. 2. More enlightening is the explanation for her query: "'Cuz these are the ones where they've been mispriced for a while and so we've been taking them down a little bit at a time." Id. (emphasis added). A subsequent Destro/IFTC conversation is similarly enlightening. Destro's unsolicited explanation for favoring the approximately $0.15 per share NAV drop attributable to the stale price corrections was:

. . . I think we want to just do this. Because it would be hard if the market comes back . . . I mean the market went down again on Friday so we could substantiate more price drops.

*****

But we can't . . . if the market starts going back up for some reason, we can't be knocking down prices.

*****

So that's why we want to take it all in.

Exh. DIV-246, Tab 20 at p. 2.⁹⁸ It is in this context that Johnson indicated PCM wanted to "take that full hit on [PJIGX]" in her 2:00 p.m. conversation with IFTC-- and in this context, Manipulation Respondents' actions on April 4, 1994 clearly were not as unequivocal and high-minded as they maintain. Moreover, nothing in this more robust picture of events is inconsistent with the scheme gradually to ratchet down the Fund's security prices/NAV over a period of days that Winson alleges. To the contrary, it is Johnson's explanation that PJIGX had been "taking [the stale-priced securities] down a little bit at a time" and Destro's concern over the prospect of "knocking down prices" in a market rebound that cannot be reconciled with Manipulation Respondents' position. I add that Johnson exhibited extraordinary recollection and attention to detail at hearing, and her inability to recall the underlying meaning/purpose of such a suggestive piece of evidence as her handwritten notations on Exh. DIV-186 strikes me as improbable.

The record establishes that PCM/IFTC used 34 of the 40 values reflected in Exh. DIV-186's "New Price" column to determine the NAV that PJIGX reported on April 4, 1994. But the record also establishes that the new prices reflected on Exh. DIV-186 were secured by Winson at approximately 10:30 a.m. in an attempt to validate the prices used on March 31, 1994. Tr. 1706-07. As such, they could not have been appropriate marks for April 4, 1994-- at least not without subsequent broker-dealer confirmation that they accurately reflected the April 4th market as well.

There is no evidence that any such confirmation was secured. Indeed, it could not have been: the record indicates that interest rates increased by 30-40 basis points between March 31st and April 4th, which necessarily would have reduced the value of any non-IO security reflected on Exh. DIV-186 in the interim.⁹⁹ Id. at 1340, 1709-10. The record nevertheless confirms that Destro faxed Exh. DIV-186 to Kenney with urgent instructions to have the indicated new prices included in Kenney's April 4th pricing report to IFTC, and also instructed IFTC to ensure that the new prices were reflected in IFTC's April 4th interim pricing reports to PJIGX-- the expectation being that these new prices would reduce the fund NAV by $0.15 per share. Exh. PCM-984, Tab 21 at pp. 2, 4.

The CMO derivative security market continued its precipitous decline on April 4, 1994. Exh. DIV-270 at p. 10. The record indicates that Kidder Peabody specifically cautioned Bruntjen, Goldstein and Winson that this decline would have a significant impact on PJIGX, but that Bruntjen and Goldstein discounted Kidder's warning. Exh. DIV-246, Tab 5 at pp. 3-4. The record also confirms that Kidder Peabody lowered its CMO derivative security marks on April 4th in response to the market decline.¹⁰⁰ Id., Tab 4 at p. 5, Tab 6 at p. 7, Tab 34. As a result of the April 4th market decline's impact on the balance of PJIGX's portfolio,¹⁰¹ IFTC's interim pricing reports to PJIGX indicated that the Fund NAV had dropped by approximately $0.40 per share rather than the $0.15 per share drop anticipated from the securities reflected on Exh. DIV-186. Id., Tab 22 at p. 1. Based on those reports, PJIGX's indicated NAV for April 4, 1994 was $10.01 per share. Tr. 1521.

PCM subsequently submitted a number of price changes to IFTC which raised PJIGX's April 4, 1994 indicated NAV to $10.10 per share. Exh. DIV-145. Some of those changes increased the prices on securities reflected in Exh. DIV-186. Id. The record indicates that it was Nelson who made the changes.¹⁰² PJIGX's April 4, 1994 pricing file, however, does not reflect any legitimate basis for the changes. Although it contains assorted Bloomberg printouts, they suffer various deficiencies as a basis for April 4, 1994 security valuations. First, I already have determined that appropriate broker-dealer marks were readily available on April 4th, rendering Bloomberg analytic valuation inappropriate under PJIGX's formal valuation procedures and policies. Second, some of the Bloomberg printouts do not provide any analytic basis for their indicated prices. Third, a number of the printouts were generated more than a month after April 4, 1994. Compounding these deficiencies is the fact that Nelson testified at hearing that he could not think of a single instance in which Bloomberg analytics actually had been used to price a PJIGX security in March or April 1994. Tr. 3952-53.

Even more telling are specific examples such as CUSIP 31358UA63, one of the stale-priced securities with a new price designated on Exh. DIV-186. Although this security's new price of 55 was included in IFTC's initial pricing report for April 4th in accordance with PCM's specific instructions, Nelson reinstated the security's stale price of 88 to calculate the Fund's final NAV for April 4, 1994.¹⁰³ Exh. DIV-145 at p. DIV-01976. Moreover, the security's price was reduced to 75 on April 5th, even though the market rallied somewhat that day and Kidder Peabody's mark on it actually increased. Exh. DIV-165 at p. DIV-02299.

I acknowledge that PJIGX's final reported NAV of $10.10 per share on April 4, 1994 was a full $0.30 per share lower than it was on March 31, 1994 (Exh. PCM-67 at p. 4), and this very well may have constituted the single largest NAV decline in Fund history. This fact notwithstanding, I am compelled to find and conclude that PJIGX's final reported NAV for April 4, 1994 was overstated to some indeterminate degree. It was based on numerous security prices reflected in Exh. DIV-186, but those prices were valid for calculating the Fund's NAV on March 31, 1994, not on April 4, 1994. In addition, at least some of the new prices reflected on Exh. DIV-186 were superceded by the same stale prices which the new prices were intended to correct. Other individual security prices on which PJIGX's final April 4, 1994 NAV was derived had no legitimate basis whatsoever.

I have struggled mightily to discern a completely innocent explanation for Manipulation Respondents' actions. And while I do not believe those actions were as nefarious or ill-motivated as Division maintains, neither do I believe that Manipulation Respondents are completely blameless in this matter. The evidence compels a conclusion that Manipulation Respondents' explanations of what took place on April 4, 1994 simply are not plausible. There is absolutely no way to reconcile the evidence indicating that Winson, Bruntjen, Goldstein, Destro, Johnson and Nelson variously participated that day in an effort to incorporate current values for the stale-priced securities into the Fund NAV over a period of days. Had I the luxury of speculation, I would conclude that Winson, Goldstein, Destro, Johnson and Nelson initially believed their actions were acceptable in light of the prevailing market turmoil, later discovering that they were not. I do not have that luxury, however, and Manipulation Respondents' untenable characterization of their actions would not permit me to indulge it in any event.

April 5, 1994:

The CMO derivative security market rebounded somewhat on April 5, 1994. Exh. DIV-270 at p. 10. Johnson was out of the office all day, and the Fund's daily valuation responsibilities fell to Destro. Tr. 4193. The record indicates that IFTC's initial pricing reports to PJIGX reflected an NAV of $10.04 per share. Exh. DIV-147 at p. DIV-02008. After incorporating various security price changes, IFTC informed Destro at approximately 4:17 p.m. that the indicated NAV had climbed to $10.05 per share. Exh. PCM-984, Tab 23. Subsequent price changes increased the NAV to $10.09 per share. At this point, Destro contacted IFTC, who informed Destro "everything's in"-- meaning that the 4:30 p.m. NASDAQ publication deadline had been met. Id., Tab 24 at p. 1. After a brief celebration, Destro indicated that she had an additional price change for IFTC to incorporate for PJIGX. Destro identified CUSIP 3133T4SJ6, instructing IFTC to "[p]ut that back to 10.9." Id. Destro indicates:

That got us a penny last time.

*****

Let's hope it gets us a penny this time.

Id. at p. 2. IFTC processed the price change and informed Destro that the change had indeed increased the NAV to $10.10 per share. The following exchange ensues:

Winson: . . . this is the one we gotta remember because this has got to go down still.

Destro: Okay.

Winson: This has to go down.

Destro: Okay.

Id. The validity of the numerous security price changes which increased the Fund's April 5, 1994 indicated NAV from $10.04 per share to $10.09 per share aside, the record is completely devoid of support for the price change to CUSIP 3133T4SJ6. More disturbing, it is virtually impossible to escape the conclusion that the CUSIP 3133T4SJ6 price change specifically was intended to inflate the NAV to $10.10 per share-- a level which apparently already had been reported to NASDAQ.¹⁰⁴ The subsequent exchange between Winson and Destro confirms that each of them: (1) understood that CUSIP 3133T4SJ6 was priced too high at 10.9; and (2) contemplated that the price subsequently would be reduced to an appropriate level. This is the essence of the kind of manipulative behavior Winson alleges.

April 6, 1994:

The record confirms that Destro contacted IFTC early on the morning of April 6, 1994, and indicated she was faxing a comprehensive typed list of all the PJIGX security price changes from the previous day. Exh. DIV-246, Tab 25 at p. 1. Destro informed IFTC that she had faxed the same document to Kenney. Id. She indicated it was imperative that the security prices reflected on the document (Exh. DIV-202) be used on April 6, 1994 for PJIGX and "[e]verything that's remotely connected to Piper . . . ." Id. The record confirms that 43 of the 44 PJIGX security prices included on Exh. DIV-202 appeared on the April 6, 1994 Kenny pricing transmission to IFTC. Compare Exh. DIV-202 with Exh. DIV-121. After receiving IFTC's initial pricing reports, Goldstein, Winson, Johnson and Destro conveyed numerous security price changes to IFTC, the ultimate result of which was an indicated NAV of $10.09 per share with less than one minute remaining before the 4:30 p.m. NASDAQ publication deadline. Exh. PCM-984, Tab 28 at pp. 3-4. At this point, the following exchange took place:

Johnson: You want to go with 10.10?

Goldstein: I'd like to go with 10.10.

Johnson: Go 10.10. We'll get it there.

IFTC: Okay.

Id. at p. 4. In accordance with Johnson's instruction, IFTC immediately reported an April 6, 1994 NAV of $10.10 per share to NASDAQ for PJIGX. Tr. 1538. When IFTC called PCM back to confirm that the NAV had made the NASDAQ publication deadline, Goldstein and Johnson both inquired: "How much do we need to round up a penny?" Exh. DIV-246, Tab 29 at p. 1. IFTC indicated that less than a half cent was required, to which Goldstein, Winson, Johnson and Destro responded they would call IFTC back.¹⁰⁵ Id. at pp.1-2. Shortly thereafter, they called IFTC back with two additional price changes.¹⁰⁶ The following exchange ensued:

Johnson: See if that gets us there.

IFTC: It does, and just barely.

Johnson: Just barely is all we wanted.

Id., Tab 30 at pp.1- 2. Once again setting aside the validity of all pre-NASDAQ publication deadline price changes, it cannot reasonably be argued that the post-deadline price changes to CUSIP 3133T2SL5 and CUSIP 3129145D2 had any purpose except to inflate the NAV to $10.10 per share-- a level which in this instance indisputably had already been reported to NASDAQ.¹⁰⁷

April 7-8, 1994:

In light of the preceding discussions, I deem it unnecessary to evaluate Manipulation Respondents' actions on April 7-8, 1994.

(d) Summary of Rulings

Manipulation Respondents' failure to discover the stale-priced security problem prior to March 31, 1994 did not violate Section 17(a). The record confirms that Kenney was a reputable/highly regarded pricing service on whose quotes it was prima facie reasonable for PJIGX to rely. The record also does not establish that any of Manipulation Respondents either knew or reasonably should have known that Kenney was providing stale prices prior to March 31, 1994.

The Investment Company Act and the February 1, 1994 PJIGX prospectus required Manipulation Respondents to use the current market values of all portfolio securities to determine the Fund NAV on March 31, 1994 and from April 4, 1994 through April 8, 1994. Any intentional or reckless deviation from the use of current market values for all portfolio securities to determine the Fund NAV constitutes NAV manipulation and therefore violates Section 17(a). There is no need to establish what motivated any NAV manipulation in order to establish a Section 17(a) violation. The issue is the fraudulent conduct itself, not its motivation. Any reasonable investor would consider an artificially inflated NAV important in the investment decision calculus and would view such an NAV as a significant alteration of the total mix of available information.

Appropriate CMO derivative security marks typically vary over some limited range due to different trader assessments of the price at which the security actually will trade at a particular point in time. This range expands to some degree in times of market turmoil. I nevertheless reject any contention that legitimate CMO security marks typically vary by 20% or more under normal market conditions. And while I accept Manipulation Respondents' general proposition that the reasonable range for CMO derivative security marks expanded during the March 31, 1994 through April 8, 1994 period at issue, I reject their corollary contentions that: (1) the reasonable range expanded to 30%; or (2) this indeterminate expanded range establishes that the prices PJIGX used to calculate the Fund NAV were reasonable, and in itself rebuts Division's allegation that the NAV was artificially maintained.

The valuation policies and procedures approved by PCM's Board of Directors for PJIGX indicates that the Fund generally would utilize an outside pricing service to value PJIGX portfolio securities and would rely on the pricing service valuations to determine the Fund's NAV. The valuation policies and procedures also anticipate that PJIGX's outside pricing service regularly would be unable to value certain securities, and sometimes would value a security "at a substantially different level than its actual market value." They therefore specify a methodology for PCM to make good faith security value determinations in the limited circumstance that market prices are "not readily available." As a general matter, PCM's valuation methodology/implementation for PJIGX does not violate Section 17(a). The Company established and implemented detailed valuation procedures and policies for PJIGX, and that those procedures and policies were in effect throughout the period at issue. But while PJIGX's valuation policies and procedures contemplate resort to Bloomberg analytics, the validity of such resort is expressly limited to circumstances in which market prices are not readily available. Any specific security price overrides implemented by Manipulation Respondents therefore were required to be based in the first instance on actual market quotes from alternate broker-dealers, and on Bloomberg extrapolations only insofar as such alternate market quotes were not readily available.

It is virtually impossible to determine with certainty whether many of the securities at issue actually were mispriced and, if so, specifically when the mispricing occurred. Neither is it necessary to do so: the issue is whether Manipulation Respondents, or any of them, purposefully attempted to manipulate the Fund NAV. If intentional or reckless security price/NAV manipulation took place, it matters only incidentally what specific securities were involved, on what day(s) they actually were mispriced or whether/to what degree the mispricing impacted PJIGX's reported NAV.

It is difficult to conceive how Manipulation Respondents better could have handled the circumstances which confronted them on March 31, 1994. Although the stale-priced security problem alone severely would have impaired Manipulation Respondents' ability to determine an accurate NAV for PJIGX on March 31, 1994, their valuation challenges that day were compounded by an extraordinary confluence of events. This confluence severely impeded Manipulation Respondents' ability to secure current market quotes from broker-dealers. Those quotes which could be obtained appeared unjustified and unreasonably low. Consistent with PJIGX's formal valuation policies and procedures, Manipulation Respondents appropriately resorted to PCM's internal Bloomberg analytic system to fair value the stale-priced securities. No security price/NAV manipulation occurred on March 31, 1994.

The record compels a conclusion that- beginning April 4, 1994-- Manipulation Respondents variously participated in an effort to incorporate current values for the stale-priced securities into the Fund NAV over a period of days.¹⁰⁸ PJIGX's April 4, 1994 reported NAV was based on numerous security prices which were valid for calculating the Fund's NAV on March 31, 1994, but not on April 4, 1994. Other individual security prices on which PJIGX's final April 4, 1994 NAV was derived had no legitimate basis or were inappropriately superceded by the same stale prices which new prices had been secured to correct. Manipulation Respondents' explanations of their actions on April 4, 1994 are not plausible in light of the evidentiary record. Security price/NAV manipulation occurred on April 4, 1994.

The same holds true for April 5, 1994 and April 6, 1994. On each of these days, a Fund NAV of $10.10 per share was reported to NASDAQ before there was adequate security price support to do so. More important, the post facto "justifications" for the NAVs reported to NASDAQ on April 5th and April 6th were spurious. On April 5th, CUSIP 3133T4SJ6 was simply restored to its previous (inappropriate) price. The April 6th CUSIP 3133T2SL5 and CUSIP 3129145D2 changes were revisions to (ostensibly legitimate) security price reductions which had been made just moments before. The sole identifiable purpose of each of these price changes was simply to boost the April 5th and April 6th NAVs from the indicated $10.09 per share to the preferred $10.10 per share. I add that the verbal exchanges which took place among Manipulation Respondents throughout their price adjustment activities confirm that they all knowingly were participating in a process which spanned a number of days.¹⁰⁹ Security price/NAV manipulation occurred on April 5, 1994 and April 6, 1994.¹¹⁰

Was Manipulation Respondents' behavior intentional or reckless? Under ordinary circumstances, I would be compelled to conclude that Manipulation Respondents intentionally violated Section 17(a). But Manipulation Respondents were not confronted with ordinary circumstances. The circumstances were disastrous by any reasonable measure. In the midst of a period of sustained market volatility, Askin defaults on March 30, 1994 and traders immediately liquidate several hundred million dollars in CMOs from Askin's funds. The very next morning, Winson and Destro accidentally discover that Kenney has been providing stale prices on an indeterminate number of PJIGX securities for a significant period of time. Several hours of intensive efforts later, Destro and Johnson conclude that as many as 40 Fund securities are implicated. Efforts to secure current prices are frustrated because of the Askin liquidation and the fact that markets are closed the following day for Good Friday. The single trader from whom Winson is able to secure prices cannot mark all of the stale-priced securities, and provides what she considers to be unreasonably low marks on the others. She is forced to rely on Bloomberg analytics to derive prices for the securities. CMO market saturation and volatility continue to complicate PCM's valuation process throughout the week of April 4, 1994. Winson manages to secure broker-dealer marks for PJIGX's stale-priced securities early on Monday morning, but those marks reflect precipitous price drops from the figures Winson derived for the securities the preceding Thursday. She and PJIGX's other portfolio managers genuinely do not believe the new marks reflect the securities' actual values. Someone therefore proposes gradually to reduce the stale-priced security values over a few days, the objective being to secure additional time to confirm the securities' actual market values. If Manipulation Respondents technically violated Section17(a) prior to this point in the account, the violation was neither intentional nor reckless.

As I stated previously, I do not believe that Manipulation Respondents' subsequent actions were as nefarious or ill-motivated as Division maintains. Nevertheless, I am compelled to find and conclude that their actions on April 4, 1994 through April 6, 1994 constituted extreme departures from standards of ordinary care. I further find and conclude that those departures presented a danger of misleading PJIGX buyers or sellers, and this danger was so obvious that each of Manipulation Respondents must have been aware of it. The NAV is the most prominent piece of information available to the investing public. Manipulation Respondents clearly realized they were engaged in a process which was intended gradually to lower specific PJIGX portfolio security prices-- and, by implication, the Fund's NAV-- over a period of days. They may not have understood that these actions were wrong. They genuinely may have believed they were adjusting the Fund's portfolio security prices/NAV to appropriate levels in an optimal manner in light of the prevailing circumstances. These possibilities notwithstanding, they also must have understood that finessing the NAV in any way necessarily presented a danger of misleading Fund buyers and sellers, if only for a short period of time. Under the standard I am obligated to apply, I therefore must find and conclude that each of Manipulation Respondents recklessly violated Section 17(a) by participating in a process which was intended gradually to lower specific PJIGX portfolio security prices and the Fund's NAV over a period of days.

G.Possible Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Based on Manipulation of the Fund's NAV

The elements for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder are essentially identical to the elements for alleged violations of Section 17(a) of the Securities Act. Any alleged violation(s) of Section 10(b) and Rule 10b-5 based on manipulation of the Fund's NAV therefore are resolved in accordance with the analyses and determinations made in Section II-F of this Initial Decision.

H. Possible Violation of Rule 22c-1, Promulgated Pursuant to Section 22(c) of the Investment Company Act, Based on Manipulation of the Fund's NAV

OIP Paragraph AP alleges that Manipulation Respondents willfully aided and abetted and caused PJIGX to violate Rule 22c-1, promulgated pursuant to Section 22(c) of the Investment Company Act, by causing the Fund to sell, purchase and redeem shares at prices which were not based on PJIGX's current NAV. To the extent this allegation is based on PJIGX portfolio security price/NAV manipulation on April 4, 1994 through April 6, 1994, it is sustained and resolved in accordance with the analyses and determinations made in Section II-F of this Initial Decision.

I. Possible Violation of Section 31(a) of the Investment Company Act and Rule 31a-1 Thereunder Based on Improper Books and Records

OIP Paragraph AQ alleges that Manipulation Respondents willfully aided and abetted and caused PJIGX to violate Section 31(a) of the Investment Company Act and Rule 31a-1 thereunder by failing to maintain appropriate books and records in support of the Fund's financial statements. To the extent that this allegation concerns the inaccuracy of PJIGX's daily pricing files and NAV reports from April 4, 1994 through April 6, 1994, it is sustained and resolved in accordance with the analyses and determinations made in Section II-F of this Initial Decision.

J. Possible Violation of Section 34(b) of the Investment Company Act Based on False Statements Concerning Risks of Fund and Calculation of Net Asset Value Contained in Registration Statements, Applications and Other Required Records

OIP Paragraph AR alleges that Manipulation Respondents willfully violated Section 34(b) of the Investment Company Act in that they made untrue statements of material facts, or omitted to state material facts, in PJIGX registration statements, reports, accounts, records or other documents required to be kept pursuant to Section 31(a) of the Investment Company Act. Specifically, OIP Paragraph AR alleges that: (1) PCM and Goldstein made false statements/omitted to state material facts regarding the Fund's investment objective, as well as the risks associated with Fund investments; (2) PCM and Goldstein made false statements/omitted to state material facts regarding Fund pricing in prospectuses, which the PJIGX registration statement filed with the Commission incorporated; and (3) Goldstein, Nelson, Johnson and Destro placed false information on PJIGX's daily NAV reports.

To the extent that OIP Paragraph AR concerns the inaccuracy of PJIGX's daily pricing files and NAV reports from April 4, 1994 through April 6, 1994, it is sustained and resolved in accordance with the analyses and determinations made in Section II-F of this Initial Decision. Insofar as OIP Paragraph AR concerns the Fund's stated investment objective, the risks associated with Fund investments or Fund prospectus misrepresentations/omissions, it is resolved in accordance with the analyses and determinations made in Section II-A of this Initial Decision.

K. Possible Violations of Section 34(b) of the Investment Company Act Based on False Statements Concerning Source of Prices Used in Calculation of Net Asset Value Contained in Registration Statements, Applications and Other Required Records

To the extent that this allegation concerns the inaccuracy of PJIGX's daily pricing files and NAV reports from April 4, 1994 through April 6, 1994, it is sustained and resolved in accordance with the analyses and determinations made in Section II-F of this Initial Decision.

L. Possible Violation of Section 207 [of the Investment Advisers Act] Based on False Statements Concerning Education Background of Respondent Bruntjen

OIP Paragraphs U and AO allege that PCM and Bruntjen willfully violated Section 207 of the Investment Advisers Act of 1940 by making untrue statements of material fact concerning Bruntjen's educational background in registration applications and reports filed with the Commission from December 1988 through October 1994. PCM concedes a Section 207 violation, but essentially dismisses the matter by noting that the misinformation long since has been corrected and claiming that an appropriate regulatory sanction was paid.

The record is replete with misrepresentations concerning Bruntjen's educational background. One example is a Form ADV filed by PCM on September 7, 1993, which indicates that Bruntjen was awarded a BBA in Economics from the University of Minnesota in 1961. Exh. DIV-16 at p. DIV-06083. Bruntjen confirmed that information was inaccurate. Tr. 1434. Although a Section 207 violation pales in comparison to other violations at issue in this proceeding, regulatory filings serve an essential purpose in ensuring full and effective public disclosure. Correction merely mitigates the effects of a prior violation.¹¹¹ I therefore find and conclude that Bruntjen and PCM violated Section 207 by misrepresenting Bruntjen's educational background.

M. Possible Failure Reasonably to Supervise

OIP Paragraphs V,W and AT allege that Kohler failed reasonably to supervise Bruntjen and Goldstein, and this failure facilitated their violations of Section 17(a) of the Securities Act, Section 10(b)/Rule 10b-5 of the Exchange Act, and Section 13(a)(3) of the Investment Company Act.

1. Party Positions

(a) Division

Division submits that Kohler was the only person at PCM who exercised direct supervisory responsibility and authority over Bruntjen/Goldstein and, as such, was ultimately responsible to ensure that they managed PJIGX in accordance with the Fund's stated investment objectives and applicable securities laws. According to Division, however, Kohler ignored numerous "red flags" indicating that Bruntjen/Goldstein were not managing PJIGX in accordance with its stated investment objective. Division contends that Kohler knew Bruntjen/Goldstein had invested the Fund predominately in high risk CMO derivative securities, and that they had compounded Fund risk through leverage. Division contends further that PJIGX's increased risk profile was pointed out to Kohler as early as January 1992 by KPMG Peat Marwick, and subsequently by the Minnesota State Auditor in January 1993 and Peat Marwick in the context of an August 25, 1993 Board of Directors Audit Committee meeting. Division also emphasizes that Kohler knew the Fund was out-performing both its benchmark index and peer funds, and also that interest rates stood at historic lows. Division maintains that Kohler should have known these circumstances indicated impending disaster for PJIGX. Division also maintains that Kohler's internal supervisory system was patently inadequate. On Division's account, the Risk Control Committee which Kohler established was ineffective, and Kohler could not legitimately rely on KPMG Peat Marwick, the Audit Committee or the Board of Directors in this regard.

(b) Kohler

Kohler emphasizes he cannot be deemed to have failed adequately to supervise Bruntjen/Goldstein if reasonable supervisory systems to prevent securities laws violations were in place. Kohler maintains Division has not established that PCM's supervisory systems were unreasonable or inadequate, and therefore has failed to establish that Kohler did not fulfill his supervisory responsibilities with respect to Bruntjen/Goldstein. In addition, Kohler stresses the fundamental principle of delegation, contending that Division has not established that any of his supervisory delegations were improper or that he had any reason to know that his reliance on the supervisory systems he had implemented was misplaced.

2. Findings of Fact/Conclusions of Law

My review of the evidence compels a conclusion that there is little need to belabor discussion on this issue. In sum, Division has not established that Kohler failed reasonably to supervise Bruntjen/Goldstein.

The applicable standard is set forth in Section 203(e)(6) of the Investment Advisers Act of 1940, which provides:

. . . [N]o person shall be deemed to have failed reasonably to supervise any person if--

(A) there have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and

(B) such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system are not being complied with.

15 U.S.C. § 80b-3 (e) (6) (2000). It follows that Kohler may be held liable for failure reasonably to have supervised Bruntjen/Goldstein if Kohler: (1) did not establish procedures and a system which reasonably would have been expected to prevent and detect securities laws violations by Bruntjen/ Goldstein; and (2) did not reasonably discharge his duties/obligations under the established procedures/system and had reasonable cause to believe that the procedures/system were not being complied with.

The record confirms that Kohler established a multi-layered and integrated internal supervisory system. In ascending order, this system consisted of: (1) the PCM Operations Department; (2) a Risk and Control Committee; (3) an Audit Committee; and (4) the Board of Directors.¹¹² Exh. KOH-2. The Operations Department was tasked with ensuring compliance between portfolio holdings and prospectus investment restrictions, and was provided with written guidelines to facilitate performance of that task. Tr. 3998-99, 4001; Exh. PCM-262; Exh. PCM-272. The Audit Committee functioned as both a check on Operations Department internal controls and a liaison between PCM's external auditors (Peat Marwick) and its Board of Directors. Most important, Kohler personally established a Risk and Control Committee in the Spring of 1993 for the express purpose of monitoring fund risk, volatility and adherence to stated investment objectives. Tr. 3030-31, 3252; Exh. PCM-269; Exh. PCM-271; Exh. PCM-276. This committee included representatives from management, as well as specifically incorporating portfolio manager peer review as a cross-check on investment strategies. Tr. 995-97, 3031-32; Exh. PCM-271. The Board of Directors provided oversight and supervision to each of the other elements- exercising direct oversight and ultimate authority over portfolio managers such as Bruntjen/Goldstein and their investment strategies. I therefore find and conclude that Kohler established procedures and a system which reasonably could have been expected to prevent and detect securities laws violations by Bruntjen/Goldstein. I further find and conclude that Kohler not only appropriately delegated various aspects of his supervisory responsibilities, but also made systematic and reasonable efforts to ensure that the individuals/entities to which he had delegated such responsibilities were fulfilling their obligations, and that the procedures/system that had been implemented were being complied with.

III. SANCTIONS

A. Summary of Violations

1. Inadequate Risk Disclosure

I determined that PCM, through Bruntjen, recklessly violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 13(a)(3) of the Investment Company Act by materially deviating from PJIGX's stated investment objective and failing to disclose or obtain shareholder authorization for the deviation. I determined that Goldstein negligently violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, as well as Section 10(b) of the Exchange Act and Rule 10b-5, by failing to attempt to prevent the Fund from making misleading disclosures or representations concerning implied duration's utility as a PJIGX risk/volatility indicator and the Fund's sale when-issued/dollar roll program qua risk/volatility hedge.

2. Security Price/NAV Manipulation

I determined that Manipulation Respondents recklessly violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Rule 22c-1 promulgated pursuant to Section 22(c) of the Investment Company Act, Section 31(a) of the Investment Company Act and Rule 31a-1 thereunder, and Section 34(b) of the Investment Company Act insofar as they variously participated in an effort to incorporate current values for stale-priced securities into the Fund NAV over a period of days from April 4, 1994 through April 6, 1994.

3. Bruntjen's Educational Background

I determined that PCM and Bruntjen willfully violated Section 207 of the Investment Advisers Act by making untrue statements of material fact concerning Bruntjen's educational background in registration applications and reports filed with the Commission from December 1988 through October 1994.

B. Proposed Sanctions

1. Division

Division advocates three categories of remedial and punitive sanctions against Respondents: (1) administrative sanctions pursuant to Sections 203(e) and (f) of the Investment Advisers Act and Section 9(b) of the Investment Company Act; (2) cease and desist orders pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act and Section 203(k) of the Investment Company Act; and (3) monetary penalties pursuant to Section 203(i) of the Investment Advisers Act and Section 9(d) of the Investment Company Act. Division submits that any sanctions imposed on Respondents should be severe due to the egregiousness of the underling violations.

Division maintains that PCM's (through Bruntjen) and Goldstein's Section 17(a), Section 10(b)/Rule 10b-5 and Section 13(a)(3) violations with respect to PJIGX's stated investment objective involved extreme departures from the disclosure requirements of the federal securities laws. Division characterizes their violations with respect to security price/NAV manipulation as more shocking still. According to Division, PCM's and Goldstein's actions in this regard attacked the very foundation of investor confidence in the market. Division adds that PCM/Goldstein compounded massive fraud by falsifying PJIGX's books and records in an effort to hide the fraudulent activity. Division also asserts that PCM/Goldstein have failed to acknowledge the wrongful nature of their conduct, stressing a likelihood of future violations. Division therefore advocates the most severe administrative sanctions of censure and revocation of PCM's registration to operate as an investment advisor, and censure and permanent bar from association with any investment advisor/investment company for Goldstein.

Division maintains that Johnson, Destro and Nelson also merit substantial administrative sanctions. Division emphasizes that Johnson, Destro and Nelson each were seasoned mutual fund accountants with substantial experience concerning mutual fund pricing, as well as books and records requirements. Despite this experience, Division contends, they each knowingly played a substantial role in manipulating PJIGX's security prices/NAV over a period of days, and concomitantly falsified Fund books and records in a purposeful attempt to obscure the manipulation. Division underscores the fact that none of Manipulation Respondents has acknowledged any wrongful conduct whatsoever, again stressing a likelihood of future violations. Division therefore proposes that Johnson be barred from association with any investment advisor/investment company, with a right to reapply for such association after five years. In consideration of what Division considers lesser roles in the Fund security price/NAV manipulation, Division proposes to bar Destro and Nelson from association with any investment advisor/investment company for a period of three years, with a right to reapply for such association thereafter.

Turning to other sanctions, Division contends that PCM, Goldstein, Johnson, Destro and Nelson each should be ordered to cease and desist from violating, or causing violations of, the securities laws. Division notes that Goldstein, Johnson and Nelson continue to be employed in the securities industry, and that nothing currently prevents Destro from returning to similar employment. Division also argues that PCM's stated intention to dissolve should not preclude a cease and desist order directed to the Company-- and any successor in interest.

Division advocates substantial monetary penalties against each culpable Respondent. In light of PJIGX's massive losses, the numerous violative acts/omissions imputed to PCM through Bruntjen and other Respondents, the allegedly compelling need to deter such conduct in the future, and the Company's allegedly unrepentant attitudes towards injured investors and the underlying securities laws violations themselves, Division advocates a $25 million penalty against PCM. Division seeks a $250,000 penalty against Goldstein as a deterrent to her, as well as to other fund managers. With respect to Johnson, Division proposes a monetary penalty of $100,000; Division proposes penalties of $50,000 each with respect to Destro and Nelson-- again based on their ostensible lesser roles in the Fund security price/NAV manipulation.

2. PCM

PCM takes the position that any request for administrative sanctions or a cease and desist order against PCM should be denied. PCM maintains that such penalties are not in the public interest inasmuch as PJIGX no longer exists and PCM seeks to withdraw its registration to operate as an investment advisor. The Company also emphasizes it has paid approximately $88 million in compensation to former shareholders, as well as approximately $2 million in fine/penalty settlements to state regulators. In addition, PCM stresses that it implemented numerous remedial compliance, disclosure and pricing procedures after the violations at issue came to light. The Company claims repeated demonstrations of contrition throughout this entire matter. It also underscores the fact that U.S. Bancorp acquired PCM on May 1, 1998 and, as a consequence, PCM exists solely for purposes of the immediate enforcement action and therefore is unable to pay monetary penalties.

3. Goldstein, Johnson, Destro and Nelson

Goldstein, Johnson, Destro and Nelson all essentially make the same argument. Each maintains s/he: (1) is a person/professional of high integrity; (2) has a heretofore immaculate industry record; and (3) did not act in an egregious manner. Accordingly, each submits that s/he already has been adequately sanctioned through the conduct of this proceeding for any violation s/he may have committed.

C. Determinations

Whether it is in the public interest to impose sanctions for securities laws violations depends on the following considerations: (1) the egregiousness of the underlying conduct; (2) whether the conduct was isolated or recurrent; (3) the degree of scienter involved; (4) the sincerity of any assurances against future violations; (5) recognition of the wrongful nature of the conduct; and (6) the likelihood of opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981). Applying this standard, I find and conclude it is appropriate to impose sanctions on each culpable Respondent.

1. PCM

The conduct attributable to PCM- particularly through Bruntjen¹¹³-- was egregious. Bruntjen recklessly violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 13(a)(3) of the Investment Company Act by materially deviating from the "consistent with preservation of capital" component of PJIGX's stated investment objective and failing either to disclose the deviation or to obtain shareholder authorization for it. In addition, Bruntjen omitted/misrepresented numerous material facts concerning Fund composition, duration, performance, weighted average life, diversification and leverage. And while PJIGX was not required to calculate/disclose effective duration, implied duration undeniably devolved into a markedly less meaningful volatility indicator as the portfolio's proportion of CMO derivative securities swelled over time. Since Bruntjen and Goldstein either knew or should have known this fact, it was misleading to continue to disclose implied duration without at least adding a caveat concerning implied duration's limited utility as a volatility indicator for a portfolio dominated by CMO derivative securities. PJIGX's overwhelming proportion of CMO derivative securities also rendered it misleading for the Fund to continue: (1) to use the Merrill Lynch 3-5 Year Treasury Bond Index as a benchmark of Fund performance; and (2) to emphasize weighted average portfolio life as an appropriate risk/volatility indicator-- particularly since the implications of excluding inverse floating CMOs from the portfolio's weighted average life calculus were not disclosed. In addition, it was affirmatively misleading to characterize Bruntjen's cash flow management "diversification" and Fund leverage as risk/volatility hedges. Goldstein compounded the situation by negligently failing to attempt to prevent the Fund from making misleading disclosures or representations concerning implied duration's utility as a PJIGX risk/volatility indicator and the Fund's sale when-issued/dollar roll program qua risk/volatility hedge.

In addition, each of Manipulation Respondents recklessly violated Section 17(a) by participating in a process which was intended gradually to lower specific PJIGX portfolio security prices and the Fund's NAV over a period of days. Their actions from at least April 4, 1994 through April 6, 1994 constituted extreme departures from standards of ordinary care and presented a danger of misleading PJIGX buyers or sellers. Moreover, this danger was so obvious that each of Manipulation Respondents must have been aware of it and, indeed, each of them clearly understood that they were engaged in a process which was intended gradually to lower the Fund NAV over a period of days. Being experienced mutual fund accountants and portfolio managers, each Manipulation Respondent also must have understood that finessing the NAV in any way was impermissible.

Finally, the record reflects numerous intentional misrepresentations concerning Bruntjen's educational background. And while such violations pale in comparison to others in this proceeding, they cannot be ignored in the sanctions calculus.

The preceding discussion demonstrates that the relevant conduct was recurrent as well as egregious. It also predominantly demonstrates reckless or intentional behavior. In contrast, however, neither Bruntjen nor any culpable Respondent-- including PCM-- demonstrated any meaningful recognition or acknowledgment of the wrongful nature of their conduct. And conceding, arguendo, that culpable Respondents' assurances against future violations are sincere, these assurances do nothing to eliminate opportunities for future violations. On balance, then, it is appropriate to impose sanctions on PCM.¹¹⁴

Before addressing what specific sanctions should be imposed on PCM, I reiterate that PJIGX investor losses are not properly at issue in this proceeding. Respondents would be no less culpable for their securities laws violations if the Fund hadn't lost a dime. I therefore find and conclude as a threshold matter that it is wholly inappropriate to determine the magnitude of any monetary penalty which may be imposed on PCM based on actual Fund losses, particularly when Respondents' conduct merely-- albeit substantially-- exacerbated losses attributable to prevailing market circumstances.

Based on the entire record in this proceeding, I find and conclude the following sanctions against PCM are appropriate and in the public interest:

1. PCM shall cease and desist from violating, or causing violations of, the federal securities laws. This determination is confined to PCM; it legitimately may not be imposed on any discrete legal entity which may be PCM's successor in interest.

2. PCM is hereby formally censured for the securities laws violations described in this Initial Decision.

3. PCM's registration to operate as an investment advisor is revoked.

4. PCM is assessed monetary penalties totaling Two Million Five Thousand Dollars (U.S. $2,005,000.00) for the securities laws violations described in this Initial Decision.

Sanctions #1 through #3 warrant no further discussion. Sanction #4 has been imposed and quantified based on a number of considerations. First, the conglomeration of acts and omissions for which PCM is liable subsumes fraud, deceit and manipulation, as well as deliberate and reckless disregard of various regulatory requirements. Second, other persons/entities in the securities industry must be deterred from such acts and omissions in the future. Third, while I have no doubt whatsoever that Division's recommended monetary penalty of $25 million could be substantiated by multiplying culpable Respondents' numerous individual violations by the appropriate "tier" penalties specified at 15 U.S.C. § 80b-3(i), a $25 million monetary sanction would be excessive. Culpable Respondents committed a minimum of four general categories of securities laws violations which would constitute "third tier" violations under the statute,¹¹⁵ the maximum penalty for which is $500,000 per violation. Moreover, a $2 million sanction for those categorical violations closely approximates PCM's prior fine/penalty settlements to state regulators for substantially the same violations.¹¹⁶ A $5,000 sanction for the Section 207 violations similarly matches the fine imposed on PCM by the State of Maryland for misrepresentations concerning Bruntjen's educational background. I therefore find and conclude that it is reasonable, appropriate and in the public interest to impose monetary sanctions totaling Two Million Five Thousand Dollars (U.S. $2,005,000.00) on PCM for the securities laws violations described in this Initial Decision.

2. Goldstein

Goldstein negligently violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, as well as Section 10(b) of the Exchange Act and Rule 10b-5, by failing to attempt to prevent the Fund from making misleading disclosures or representations concerning implied duration's utility as a PJIGX risk/volatility indicator and the Fund's sale when-issued/dollar roll program qua risk/volatility hedge. She also recklessly violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Rule 22c-1 promulgated pursuant to Section 22(c) of the Investment Company Act, Section 31(a) of the Investment Company Act and Rule 31a-1 thereunder, and Section 34(b) of the Investment Company Act insofar as she participated in an effort to incorporate current values for stale-priced securities into the Fund NAV over a period of days from April 4, 1994 through April 6, 1994 and approved unsubstantiated NAVs for PJIGX on those dates. But while Goldstein's behavior was inappropriate and reckless in significant degree, I find and conclude it was not egregious in light of the totality of circumstances which confronted her. Based on the entire record in this proceeding, I find and conclude the following sanctions against Goldstein are appropriate and in the public interest:

1. Goldstein shall cease and desist from violating, or causing violations of, the federal securities laws.

2. Goldstein is hereby formally censured for the securities laws violations attributed to her in this Initial Decision.

I expressly find and conclude that Goldstein has otherwise been adequately sanctioned and rehabilitated through the conduct of this proceeding. It therefore would not be appropriate or in the public interest to bar Goldstein from association with any investment advisor/investment company for any period of time or to impose monetary sanctions on her.

3. Johnson, Destro and Nelson

Johnson, Destro and Nelson recklessly violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Rule 22c-1 promulgated pursuant to Section 22(c) of the Investment Company Act, Section 31(a) of the Investment Company Act and Rule 31a-1 thereunder, and Section 34(b) of the Investment Company Act insofar as they variously participated in an effort to incorporate current values for stale-priced securities into the Fund NAV over a period of days from April 4, 1994 through April 6, 1994. But while their various behavior was inappropriate and reckless in significant degree, I find and conclude it was not egregious in light of the totality of circumstances which confronted them. Based on the entire record in this proceeding, I find and conclude the following sanctions against Johnson, Destro and Nelson are appropriate and in the public interest:

1. Johnson, Destro and Nelson each shall cease and desist from violating, or causing violations of, the federal securities laws.

2. Johnson, Destro and Nelson each is hereby formally censured for the securities laws violations attributed to them in this Initial Decision. If formal censure technically may not be imposed on Johnson, Destro or Nelson,¹¹⁷ s/he is hereby officially reprimanded for the securities laws violations attributed to them in this Initial Decision.

I expressly find and conclude that Johnson, Destro and Nelson have otherwise been adequately sanctioned and rehabilitated through the conduct of this proceeding. It therefore would not be appropriate or in the public interest to bar them from association with any investment advisor/investment company for any period of time or to impose monetary sanctions on them.

IV. MATTERS NOT DISCUSSED

This Initial Decision's failure to discuss any matter raised by the parties, or any portion of the record, does not indicate that it has not been considered. Rather, any such matter(s) or portion(s) of the record has/have been found irrelevant, immaterial or meritless. Arguments made on brief which were unsupported by record evidence or legal precedent have been accorded no weight.

V. RECORD CERTIFICATION

Pursuant to Rule 351(b) of the Commission's Rules of Practice,17 C.F.R. § 201.351(b) (2000), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on June 24, 1999, as modified by my July 19, 1999 Order Approving/Adopting Proposed Correction to Joint Post-Hearing Exhibit List.

VI. ORDER

Based on the determinations set forth in this Initial Decision, I ORDER as follows:

1. PCM shall cease and desist from violating, or causing violations of, the federal securities laws;

2. PCM is formally censured for the securities laws violations described in this Initial Decision;

3. PCM's registration to operate as an investment advisor is revoked;

4. PCM is assessed monetary penalties totaling Two Million Five Thousand Dollars (U.S. $2,005,000.00) for the securities laws violations described in this Initial Decision;

5. Goldstein shall cease and desist from violating, or causing violations of, the federal securities laws;

6. Goldstein is formally censured for the securities laws violations attributed to her in this Initial Decision;

7. Johnson, Destro and Nelson each shall cease and desist from violating, or causing violations of, the federal securities laws;

8. Johnson, Destro and Nelson each is formally censured for the securities laws violations attributed to them in this Initial Decision. If formal censure technically may not be imposed on Johnson, Destro or Nelson, s/he is hereby officially reprimanded for the securities laws violations attributed to them in this Initial Decision; and.

9. Any OIP allegation not specifically sustained in this Initial Decision is dismissed.

Payment of the monetary penalties assessed in this Initial Decision shall be made on the first business day after the decision becomes final with respect to PCM. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to "Securities and Exchange Commission"; (3) delivered by hand or courier to the Office of the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549; and (4) submitted under cover letter which identifies Piper Capital Management Incorporated as liable Respondent in Administrative Proceeding File No. 3-9657.

This order shall become effective in accordance with, and subject to, Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360 (2000). Pursuant to that rule, a petition for review of this Initial Decision may be filed within twenty-one (21) days after service of the decision. This Initial Decision shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one (21) days after service of the decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this Initial Decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, this Initial Decision shall not become final as to that party.

H. Peter Young
Presiding Administrative Law Judge

Footnotes

http://www.sec.gov/litigation/aljdec/id175hpy.htm