In re PILGRIM BAXTER &

ADMINISTRATIVE PROCEEDING 
File No. 3-11524 
 
UNITED STATES OF AMERICA 
Before the 
SECURITIES AND EXCHANGE COMMISSION 
In the Matter of 
PILGRIM BAXTER & 
ASSOCIATES, LTD., 
Respondent. 
 
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PLAN OF DISTRIBUTION 
 
1 Introduction 
1.1 This Distribution Plan sets forth the procedures by which to distribute to investors, 
for the period spanning June 1998 through December 2001, their proportionate 
share of the fund established to compensate such investors for injury they may have 
suffered as a result of market timing in Pilgrim Baxter mutual funds (“PBHG 
Funds”).  The fund is not intended to compensate investors for losses they incurred 
because of fluctuations in securities markets.    
2 The Engagement 
2.1 Kenneth Lehn, Ph.D., has been engaged as the Independent Distribution Consultant 
(“IDC”) in the captioned matter.  In that capacity, Dr. Lehn is to develop a plan to 
distribute a fund collected by the Securities and Exchange Commission 
(“Commission”) pursuant to three Commission orders related to the Commission’s 
finding that, from June 1998 through December 2001, certain accountholders in the 
PBHG Funds engaged in short-term trading of PBHG Funds that violated 
restrictions placed on the annual number of permissible exchanges out of PBHG 
Funds as described in the PBHG Funds’ prospectuses.
1
 
                                                 
 
1
    In the Matter of Pilgrim Baxter & Associates, Ltd., Admin. Proc. File No. 3-11524 (June  21, 2004) 
(“PBA  Order”); In the Matter of Gary L. Pilgrim, Admin. Proc. File No. 3-11739 (Nov. 17, 2004) 
(“Pilgrim Order”); In the Matter of Harold J. Baxter, Admin. Proc. File No. 3-11740  (Nov. 17, 2004) 
(“Baxter Order”) (collectively, the “Orders”). 
 
 

2.2 The PBA Order required Pilgrim Baxter & Associates, Ltd.
 
(“PBA”),
2
 investment 
adviser to the PBHG Funds during the period June 1998 through December 2001, 
to pay $90 million, including $40 million in disgorgement and $50 million in a civil 
penalty. 
2.3 The Pilgrim Order required Gary L. Pilgrim (“Mr. Pilgrim”), former President, 
Chief Investment Officer, and Director of PBA, to pay $80 million, including $60 
million in disgorgement and $20 million in a civil penalty. 
2.4 The Baxter Order required Harold J. Baxter (“Mr. Baxter”), former Chief Executive 
Officer and Chairman of the Board of Directors of PBA, to pay $80 million, 
including $60 million in disgorgement and $20 million in a civil penalty.  
2.5 Pursuant to the Orders, PBA, Mr. Pilgrim, and Mr. Baxter (collectively, the 
“Respondents”) paid a total of $250 million.  The money currently is being held as 
follows: 
2.5.1 $90 million in escrow in a Fair Fund
3
 maintained in connection with 
the PBA Order by the United States Department of the Treasury, 
Bureau of Public Debt (“Treasury”), earning interest through 
investment in short-term U.S. Treasury securities with maturities not 
to exceed six months (“Fair Fund1”).  All interest earned will inure to 
the benefit of investors, except as otherwise provided in the Orders. 
2.5.2 $160 million in escrow in a Fair Fund maintained in connection with 
the Pilgrim Order and the Baxter Order by the Treasury, earning 
interest through investment in short-term U.S. Treasury securities with 
maturities not to exceed six months (“Fair Fund2”).  All interest 
earned will inure to the benefit of investors, except as otherwise 
provided in the Orders. 
Fair Fund1 and Fair Fund2 each have separate taxpayer identification numbers.  Prior to 
the establishment of the bank accounts referenced below, ¶¶8.3.2.1-8.3.2.2., and 
consistent with the Orders, which contemplate one distribution, Fair Fund2 (including 
any interest or earnings thereon) will be transferred to Fair Fund1.  The aggregated 
account (including any interest or earnings thereon), referenced herein as the “Final Fair 
Fund,” will be in the name and bearing the taxpayer identification number of Fair Fund1.        
2.6 As the IDC, Dr. Lehn has been asked to develop a Distribution Plan for the 
distribution of the Final Fair Fund according to a methodology developed in 
                                                 
 
2
    Pilgrim Baxter & Associates, Ltd. has since changed its name to Liberty Ridge Capital, Inc (“LRC”).  
The entity is referenced herein, in short form, as “PBA”. 
3
    “Fair Fund” as defined in Section 308(a) of the Sarbanes Oxley Act of 2002.  
 
2 
 

consultation with PBA and acceptable to the staff of the Commission and the 
independent Trustees of the affected PBHG Funds (the “Distribution Plan”).  The 
Distribution Plan is to “provide for investors to receive, from the monies available 
for distribution, in order of priority, (i) their proportionate share of losses suffered 
by the fund due to market timing, and (ii) a proportionate share of advisory fees 
paid by funds that suffered such losses during the period of such market timing.”
4
 
2.7 In completing this engagement, Dr. Lehn has been guided by the terms of the 
Orders and by the following assumptions.  These assumptions are made solely for 
the purpose of developing the Distribution Plan and, for that sole purpose, are 
agreeable to the Commission, counsel for PBA, and to Dr. Lehn.  These 
assumptions include the following: 
2.7.1 At all relevant times, the PBHG Funds’ prospectuses limited accounts 
to four exchanges from a PBHG Fund into the PBHG Cash Reserves 
Fund during each calendar year. 
2.7.2 Market timing consists of short-term roundtrip exchanges from  (into) a 
PBHG fund into (from) the PBHG Cash Reserve Fund by any one 
account in excess of the four exchange annual limit
5
 disclosed in the 
PBHG Funds’ prospectuses.
6
 
2.7.3 Any losses suffered by PBHG Funds due to market timing are those 
associated with short-term roundtrip exchanges in excess of the four-
exchange limit per PBHG Fund per calendar year. 
2.8 This Distribution Plan relies on the findings in the Orders and the assumptions set 
forth above, and makes no independent assessment as to the legality of the market 
timing in PBHG Funds.  As a result, the estimated dilution losses associated with 
market timing in PBHG Funds, as presented herein, are not intended to be, nor 
should they be interpreted to be, an estimate of damages associated with illegal 
                                                 
 
4
    PBA Order at ¶ III.37.a. 
5
    To identify short-term roundtrip exchanges, in the empirical analysis that follows Dr. Lehn restricts the 
corresponding exchanges from and into the PBHG Cash Reserve Fund to those for which the time 
difference is no more than 30 calendar days.  Dr. Lehn has replicated the analysis by extending the time 
difference between exchanges from and into the PBHG Cash Reserve Fund to 60 calendar days.  The 
empirical results do not change significantly when short-term roundtrip exchanges are identified in this 
way. 
6
    This assumption encompasses more than 99.5% of the value of all trades by accounts represented to be 
associated with the "New York Broker" referred to in Section III.4 of the PBA Order, and reflects 100% 
of the value of all trades by accounts represented to be associated with the "hedge fund family" referred 
to in Section III.4 of the PBA Order. 
 
3 
 

timing in PBHG Funds.  Rather, the estimated dilution losses were calculated as a 
means to allocate to investors, as compensation for losses suffered by the PBHG 
Funds, a proportionate share of the fixed settlement payments made by the 
Respondents, together with accrued interest. 
2.9 It is the view of Dr. Lehn, the methodology described herein constitutes a fair and 
reasonable allocation of the Final Fair Fund in the context of the captioned matter. 
3 Qualifications 
3.1 Dr. Lehn is the Samuel A. McCullough Professor of Finance in the Katz School of 
Business at the University of Pittsburgh.  He teaches graduate level courses in 
finance, including courses on business valuation, corporate governance, and 
corporate restructuring.  He also teaches a finance course for law students in the 
School of Law at the University of Pittsburgh.  His research, primarily in the field 
of corporate finance, has been published in leading academic journals in finance 
and economics, including the Journal of Financial Economics, Journal of Finance, 
Journal of Political Economy, American Economic Review, and the Journal of Law 
and Economics. 
3.2 Dr. Lehn served as Chief Economist at the Securities and Exchange Commission 
during 1987 to 1991.  He also served as Deputy Chief Economist at the 
Commission during 1984 to 1985.  In these capacities, Dr. Lehn worked on 
numerous matters involving mutual funds with the Division of Investment 
Management and the Division of Enforcement.  Since leaving the Commission in 
1991, Dr. Lehn has testified on behalf of the Commission and the Department of 
Justice in many civil and criminal cases involving alleged violations of U.S. 
securities laws.  He also has testified many times in private litigation involving 
alleged violations of securities laws. 
3.3 He received a B.A. in economics from Waynesburg College in 1975, an M.A. in 
economics from Miami University in 1976, and a Ph.D. in economics from 
Washington University in 1981.   
4 Representations 
4.1 To the best of his knowledge, Dr. Lehn has received full cooperation from the 
Respondents, including access to data and individuals as requested. 
4.2 Several people at Cornerstone Research have assisted Dr. Lehn in developing this 
Distribution Plan, including Jamie Meehan, Slava Karguine, and Yingcong Lan of 
Cornerstone Research.  All work in this matter has been done under Dr. Lehn’s 
direction. 
4.3 Dr. Lehn has never been employed by PBA.  Under the terms of the PBA Order, 
Dr. Lehn agrees that, for the period of this engagement and for a period of two 
years from completion of this engagement, he will not enter into any employment, 
 
4 
 

consultant, or other professional relationship with PBA or “any of its present or 
former affiliates, directors, officers, employees, or agents acting in their capacity as 
such.” 
4.4 Pursuant to the terms of the PBA Order, Cornerstone Research and/or its 
representatives set forth above will not, without prior written consent of the 
independent Trustees of the PBHG Funds and the staff of the Commission, enter 
into any employment, consultant, attorney-client, auditing or other professional 
relationship with PBA, now LRC, or any of its present or former affiliates, 
directors, officers, employees, or agents acting in their capacity as such for the 
period of this engagement and for a period of two years after this engagement. 
4.5 The conclusions Dr. Lehn has reached in this matter should be viewed as specific to 
this engagement and to the facts of this case, and may or may not apply elsewhere. 
5 Background 
5.1 In the Orders, the Commission found that the Respondents violated, variously, 
directly and/or indirectly, Section 17(a) of the Securities Act of 1933; Section 10(b) 
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; Section 34(b) 
of the Investment Company Act of 1940; and Sections 204A, 206(1), and 206(2) of 
the Investment Advisers Act of 1940.  None of the Respondents admitted or denied 
any of the Commission’s findings in the Orders. 
5.2 The Commission found, among other things, that contrary to the disclosures made 
in the prospectuses of all PBHG Funds since at least 1996, PBA, acting through 
Mr. Pilgrim and Mr. Baxter, allowed various accountholders to engage in 
transactions that violated the PBHG Funds’ prospectus disclosures from at least 
June 1998 through December 2001.  Specifically, the PBHG Funds’ prospectuses 
disclosed that investors were limited to not more than four exchanges per year into 
the PBHG Cash Reserves Fund from any other PBHG Fund.  Furthermore, the 
prospectuses did not indicate that there would be any exceptions to this policy.  The 
Commission found, in relevant part, that PBA, acting through Mr. Pilgrim and Mr. 
Baxter, allowed various accountholders to make more than four exchanges per year 
into the PBHG Cash Reserves Fund from other PBHG Funds. 
5.3 As stated above, the Respondents entered into separate agreements with the 
Commission, culminating in the Orders.
7
  Under the terms of the Orders, the three 
defendants collectively agreed to make a total settlement payment of $250 million 
($90 million by PBA and $80 million each by Mr. Pilgrim and Mr. Baxter), 
including $160 million in disgorgement ($40 million by PBA and $60 million each 
                                                
 
 
7
    Simultaneous with their settlement with the Commission, the Respondents settled related litigation with 
the New York Attorney General. N.Y. v. Pilgrim Baxter & Associates, Ltd., et al., Index No. 
403728/2003 (N.Y. County).    
 
5 
 

by Mr. Pilgrim and Mr. Baxter) and $90 million in civil penalties ($50 million by 
PBA and $20 million each by Mr. Pilgrim and Mr. Baxter).  
5.4 Pursuant to the PBA Order, Dr. Lehn was retained by PBA in September 2004 to 
develop a plan for distributing its $90 million settlement payment to accountholders 
in PBHG Funds who may have been affected by the alleged market timing 
described in the Order.  After Mr. Pilgrim and Mr. Baxter settled with the 
Commission in November 2004, Dr. Lehn was asked to specifically include their 
collective payment of $160 million in the Distribution Plan.   
5.5 Accountholders purchased shares in the PBHG Funds through one of three 
distribution channels.  Each distribution channel presents unique challenges to the 
Distribution Plan, and the manner of distribution to each channel is described 
herein. 
5.5.1 Direct Purchase Holders – Certain purchasers bought their shares 
directly through the distributor for the PBHG Funds by submitting an 
application with payment to either a third party transfer agent or to a 
PBA affiliated servicing company. 
5.5.2 Holders in Omnibus Accounts – Other purchasers bought their shares 
through brokerage firms that functioned as the accountholder of 
record.  Under this structure, the brokerage firm provided to the 
transfer agent, on a daily basis, customer transaction data concerning 
the number of shares purchased and sold by all customers on an 
aggregate basis.  Specific information, such as a Tax Identification 
Number for each customer or account, was not provided.
 
5.5.3 Holders in Broker Dealer Accounts - Other purchasers bought their 
shares through brokerage firms that, for each account, provided to the 
transfer agent a unique identifier and information concerning the 
number of shares each unique identifier purchased or sold.  Specific 
information, such as name and address, was not provided. 
5.6 Dr. Lehn sets forth below the methodology used to develop the plan for calculating 
and distributing the Final Fair Fund to accountholders in the PBHG Funds during 
the relevant times.       
6 Methodology Used to Develop Distribution Plan 
6.1 Identifying Market Timers 
6.1.1 To estimate the effect of transactions that allegedly violated the PBHG 
Funds’ prospectus disclosures on accountholders in PBHG Funds, Dr. 
Lehn requested data on all transactions by all accounts in all PBHG 
 
6 
 

Funds during June 1998-2001 from PBA.  PBA provided Dr. Lehn 
with a database independently compiled by Deloitte LLP in connection 
with PBA’s settlement discussions with the Commission.  Dr. Lehn 
understands that the Commission and PBA relied on this database in 
arriving at their settlement.   
6.1.2 Upon receiving the Deloitte database, Dr. Lehn identified all accounts, 
other than omnibus accounts, in each PBHG Fund that made more than 
four exchanges in a calendar year into the PBHG Cash Reserve Fund.  
To identify short-term exchanges made by these accounts, Dr. Lehn 
restricted the corresponding exchanges from and into the PBHG Cash 
Reserve Fund to those for which the time difference is no more than 
30 calendar days.  Hereafter, accounts that made more than four 
exchanges in a calendar year into the PBHG Cash Reserve Fund and 
made short-term exchanges are referred to as “market timers.”  
6.1.3 Table 1 shows the number of market timers and the value of all trades 
by market timers in each fund during the period of June 1998 through 
December 2001.  The table shows that the fund with the largest 
number of market timers was the Technology & Communications 
Fund (2,063), followed by the Growth Fund (927), Select Growth 
(903), and Emerging Growth Fund (658).  The fund with the largest 
dollar volume of transactions by these accounts is the Growth Fund 
($75 billion), followed by Technology & Communications ($27 
billion), Emerging Growth ($13 billion), and Select Growth ($8 
billion). 
6.1.4 Similarly, Table 2 lists the number of market timers and the value of 
all trades by market timers across all funds in each quarter during the 
period June 1998 through December 2001.  The table indicates that 
market timing activity was substantially higher during 2000-2001 than 
it was during 1998-1999. 
6.2 Estimating Dilution Losses Associated with Trading by Market Timers 
6.2.1 To estimate the dilution losses incurred by accountholders in PBHG 
Funds resulting from transactions by market timers during June 1998 
through December 2001, Dr. Lehn estimated the total excess short-
term profits earned by market timers in each of the PBHG Funds 
during the period June 1998 through December 2001. 
 
7 
 

6.3 Next Day NAV and Realized Profits Approaches 
6.3.1 The amount of dilution losses associated with market timing is related 
to how the fund manager invests the cash flows invested by market 
timers in the fund.  For example, if the fund manager fully invests the 
net cash flows in equity securities and/or equity derivatives the day 
after a frequent trader invests in the fund, and liquidates the equity 
investment the day after the frequent trader exits the fund, then the 
“next day NAV” approach is an appropriate way to estimate dilution 
losses associated with market timing (e.g., see Green and Hodges 
(2000)).  Under this approach, dilution losses are equal to the sum of 
the frequent trader’s first day profits and avoided loss on the day he 
exits the fund. 
6.3.2 Alternatively, in Dr. Lehn’s opinion, if the fund manager holds all of 
the frequent trader’s net cash flows as cash (i.e., if he does not invest 
any of the frequent trader’s cash flows in equity securities), then the 
“realized profits” approach is an appropriate way to estimate dilution 
losses associated with market timing.  Under the realized profits 
approach, dilution losses are equal to the frequent trader’s holding 
period profits. 
6.3.3 A third possibility is that the fund manager invests some of the 
frequent trader’s net cash flows in equity securities and holds the 
remainder in cash.  In this case, dilution losses lie in between the 
dilution losses estimated under the next day NAV approach and the 
realized profits approach. 
6.4 Empirical Analysis of How PBHG Fund Portfolio Managers Invested Cash Flows 
from Market Timers  
6.4.1 To estimate how the PBHG Fund portfolio managers invested the net 
cash flows invested in the funds by market timers, Dr. Lehn estimates 
an ordinary least squares regression of the daily net equity purchases 
for each PBHG Fund.  For each fund, he regresses daily net equity 
purchases on two variables: (i) net cash flows invested by market 
timers and (ii) net cash flows invested by other accounts.  For each 
fund, he estimates ten separate regression models in which net cash 
flows invested by market timers and other accounts are measured as 
lagged variables, with lags of one through ten trading days before the 
day in which the fund’s net equity purchases (i.e., the dependent 
variable) is measured.  Dr. Lehn estimates the regressions over two 
sub-periods: 1998-1999, a period in which equity markets generally 
were rising substantially, and 2000-2001, a period in which equity 
markets generally were declining substantially. 
 
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6.4.2 Table 3 reports the results from estimation of the regression models.  
The results show that across all funds the coefficients on the net cash 
flows invested by market timers fluctuate between being positive and 
negative.  The coefficient on this variable is positive and statistically 
significant at the 0.05 level in only two of the 80 regressions.  The 
results do not allow one to reject the null hypothesis that the portfolio 
managers of the four funds held the market timers’ cash flows as cash 
(i.e., they did not invest any of the market timers’ cash flows in equity 
securities and/or equity derivatives).
8
 
6.4.3 The results from the empirical analysis reported in Table 3 are 
consistent with a conversation Dr. Lehn had with PBA’s Senior 
Investment Officer, who indicated that it is likely that market timers’ 
cash flows were held as cash, at least by the Growth Fund, which was 
managed by Mr. Pilgrim, and, as seen below, accounts for almost two-
thirds of the aggregate dilution losses incurred by PBHG 
accountholders.  PBA’s Senior Investment Officer did not have an 
opinion as to the likelihood that market timers’ cash flows were held 
as cash in the other PBHG Funds during this period.     
6.4.4 Based on the regression results reported in Table 3, it is Dr. Lehn’s 
opinion that the realized profits approach is the appropriate way to 
estimate the dilution losses associated with market timers in the PBHG 
Funds. 
6.4.5 The conclusion that the market timers’ cash flows were not invested in 
equity securities also implies that accountholders in PBHG Funds 
incurred minimal losses due to transaction costs associated with 
changes to the funds’ portfolios caused by market timers’ transactions 
in PBHG Funds.  As a result, in developing this Distribution Plan, Dr. 
Lehn focuses only on the dilution losses incurred by PBHG 
accountholders due to transactions in PBHG Funds by market timers. 
6.5 Total Excess Short-Term Profits by Market Timers 
6.5.1 To arrive at the percentage of the total settlement proceeds that should 
be distributed to accountholders of each fund on each day over this 
period, Dr. Lehn estimated the total excess short-term profits earned 
                                                 
 
8
    Dr. Lehn obtained and examined data on the daily security holdings of the four PBHG Funds that 
account for almost all of the estimated dilution losses (Emerging Growth, Growth, Select Growth, and 
Technology & Communications) during the period of June 1998 through 2001.  He found no evidence 
that the funds “equitized” their portfolios by investing in equity derivatives.    
 
9 
 

by market timers in each PBHG Fund on each day during the period 
June 1, 1998 through December 31, 2001.  For reasons described in 
the previous section, he uses the realized profits approach to estimate 
the total excess short-term profits earned by market timers.        
6.5.2 To illustrate how the dilution losses associated with market timing 
vary over time, Table 4 shows the total excess short-term profits 
earned by the market timers in each PBHG Fund in each quarter 
during the second quarter of 1998 through the fourth quarter of 2001.
9
  
The table shows that market timers earned total excess profits of 
$242.8 million in all PBHG Funds during the period.  The total 
includes excess profits of approximately $14 million in 1998, $95 
million in 1999, $12 million in 2000, and $122 million in 2001. 
6.5.3 The excess profits earned by market timers, and hence, the dilution 
losses incurred by accountholders in PBHG Funds, are highly 
concentrated in three quarters: Q4 1999, Q1 2000, and Q2 2001.  
These three quarters account for approximately $255 million, or 105%, 
of the total excess profits.  The reason that these three quarters account 
for more than 100% of the aggregate dilution losses is that the dilution 
losses incurred by accountholders in PBHG Funds during these 
quarters were offset in part by benefits that the accountholders 
received when the market timers’ cash flows were held as cash during 
periods in which the market was declining in value.          
6.5.4 The table also shows that the excess profits are also highly 
concentrated in four PBHG Funds.  The Growth Fund accounts for 
approximately $165 million, or 68.1%, of the total excess profits, 
followed by the Emerging Growth Fund (approximately $50 million), 
the Technology and Communications Fund (approximately $18 
million), and the Select Growth Fund (approximately $5 million).  
Together, the four funds account for approximately $238 million, or 
98%, of the total excess profits. 
6.5.5 Cross-tabulation of the data reveals that approximately $250 million, 
or 103.1%, of the excess profits earned by market timers in the PBHG 
Funds are accounted for by market timing in the four funds (Growth, 
Emerging Growth, Technology and Communications, and Select 
                                                 
 
9
    Dr. Lehn adjusted the profits for accumulation of prejudgment interest.  For its calculation, Dr. Lehn 
applied the interest rate used by the IRS for corporate tax underpayments (Section 6621 of the Internal 
Revenue Code). The interest on the profits lost by a fund in a particular quarter is calculated by 
cumulative application of the IRS quarterly interest rates starting from the quarter when the profits were 
lost and ending December 2001. 
 
10 
 

Growth) during the three quarters (Q4 1999, Q1 2000, and Q2 2001).  
Accordingly, accountholders of those four funds during those three 
quarters incurred most of the dilution losses associated with market 
timing in the PBHG Funds. 
7 The Distribution Plan  
7.1 The excess profits earned by market timers in each PBHG Fund on each day during 
the period June 1, 1998 through December 31, 2001 is calculated as a percentage of 
the total excess profits of $242.8 million.  The daily settlement proceeds for each 
fund on each day are then calculated as the percentage on that day times the $250 
million (plus earned interest) in total settlement proceeds.   
7.2 “Accountholders” of each PBHG Fund, including Direct Purchase Holders, Holders 
in Omnibus Accounts and Holders in Broker Dealer Accounts, are entitled to a 
prorated share of their PBHG Funds’ daily settlement proceeds.  The prorated share 
is to be calculated as the percentage of the value of the Fund held by an 
accountholder on a given day times the Fund’s daily settlement proceeds.    
7.3 For example, suppose an accountholder owned 0.1% of the Growth Fund on a day 
when Growth Fund accountholders are entitled to a total of $1 million in settlement 
proceeds.  Under the Distribution Plan, the accountholder would receive $1,000 to 
compensate it for dilution losses associated with market timing in the Growth Fund 
on this day (i.e., 0.001 times $1 million).   
7.4 To illustrate how the proportion of total settlement proceeds to be allocated varies 
over time, Table 5 presents the excess profits earned by market timers in each fund 
in each quarter as a percentage of the total excess profits of $242.8 million.  These 
percentages effectively reflect the proportion of total dilution losses incurred by 
PBHG accountholders because of market timing over the period. 
7.5 To illustrate how the amount of settlement proceeds to which accountholders in 
each fund are entitled varies over time, Dr. Lehn multiplies the quarterly 
percentages in Table 5 by $250 million, the total amount of the settlement proceeds 
before interest.  These calculations, which are contained in Table 6, represent the 
distribution of the settlement proceeds across each PBHG Fund in each quarter 
during Q2 1998 through Q4 2001.  Note that the distribution in a specific quarter 
can be negative because the negative amount (representing benefits to long-term 
accountholders from market timing) is used to offset positive amounts in other 
quarters for other funds.      
7.6 Except as provided in ¶7.7 below, accountholders who engaged in market timing 
will not be eligible for a distribution unless the losses they incurred from market 
timing by other accountholders exceed the losses other accountholders incurred 
from their market timing.  For example, suppose an accountholder engaged in 
market timing that is estimated to have resulted in $1 million of losses for other 
 
11 
 

accountholders.  Unless the losses this accountholder incurred from market timing 
by other accountholders exceed $1 million, this accountholder receives no 
distribution.  If the losses this accountholder incurred from market timing by other 
accountholders exceed $1 million, then this accountholder receives a distribution 
that is net of the losses its market timing resulted in for other accountholders.  If, 
for example, this accountholder incurred $1.5 million of losses from market timing 
by other accountholders, then this accountholder receives a distribution of 
$500,000 (i.e., $1.5 million minus $1 million).  
7.7 The Respondents will not be eligible for a distribution under this Distribution Plan.  
In addition, accountholders who, prior to distribution under the Distribution Plan, 
are subject to order(s) of the Commission, a court, or other authority, by settlement 
or otherwise, of which Dr. Lehn has notice, finding them responsible for losses 
suffered by PBHG Funds in connection with the market timing of PBHG Funds 
during the period spanning June 1998 through December 2001, will not be eligible 
for a distribution under the Distribution Plan.    
7.8 Only accountholders with an aggregate prorated share of at least $10 (including 
accounts that have negative aggregate damages) across all funds and quarters are 
eligible to receive a distribution from the Final Fair Fund.  This decision is based 
on the conclusion that it is not cost effective to attempt to distribute amounts of less 
than $10 to individual accounts.  The distribution amount per accountholder will be 
prorated so that the total amount sent to accountholders equals the amount available 
in the Final Fair Fund.   
7.9 Any monies not distributed to individual accounts shall be distributed to the PBHG 
Funds based on the proportion of aggregate excess profits by market timers 
accounted for by each PBHG Fund.  For example, suppose $20 million of the $250 
million is not distributed to accountholders (including both individual and omnibus 
accounts).  Then $13.61 million of the settlement proceeds will be distributed to the 
PBHG Growth Fund (i.e., $20 million times 0.681 (the proportion of aggregate 
excess profits earned by market timers in the Growth Fund)).
 
 
8 Distribution of Funds 
8.1 Fund Administrator.  Boston Financial Data Services (“BFDS”) has been selected 
by Dr. Lehn to serve as Fund Administrator pursuant to Rule 1105 of the 
Commission’s Rules of Practice, 17 C.F.R. §201.1105 (the “Fund Administrator”). 
BFDS, founded in 1973, is a third-party service provider that provides transfer 
agency services to over 145 fund companies.  BFDS has extensive experience in 
both the settlement administration industry (over 11 years) and the mutual fund 
industry (over 30 years).  BFDS will be compensated for its time and expenses by 
one or more of the Respondents in accordance with the terms set forth in the 
Orders.  Under the supervision of Dr. Lehn, BFDS will perform the duties and 
obligations set forth herein, including overseeing the administration of the Final 
Fair Fund; distributing funds from the Final Fair Fund to accountholders in 
accordance with the Distribution Plan; preparing and submitting to the staff in 
 
12 
 

accordance with Rule 1105(f) periodic accountings of all monies earned or received 
and all monies spent in connection with the administration of the Distribution Plan; 
and, with Dr. Lehn, submitting a final accounting for approval by the Commission 
and/or its delegate. 
8.2 Limitation on Liability.  The IDC and the Fund Administrator, and/or each of their 
designees, agents and assistants, shall be entitled to rely on any Orders issued in 
this proceeding by the Commission, the Secretary by delegated authority, or an 
Administrative Law Judge, and may not be held liable to any person other than the 
Commission, the Final Fair Fund, Fair Fund1, and Fair Fund2 for any act or 
omission in the course of administering the Distribution Fund, except upon a 
finding in this proceeding that such act or omission is caused by such party's gross 
negligence, bad faith or willful misconduct, reckless disregard of duty, or reckless 
failure to comply with the terms of the Distribution Plan.  This limitation on 
liability clause also applies to any order(s) to distribute additional funds, as further 
described below, ¶8.16.  
8.3 Custody of the Final Fair Fund and Other Security Issues.   
8.3.1 The Final Fair Fund, Fair Fund1, and Fair Fund2 constitute Qualified 
Settlement Funds (“QSF”) under Section 468B(g) of the Internal 
Revenue Code, 26 U.S.C. §468B(g), and related regulations, 26 C.F.R. 
§§1.468B-1 through 1.468B-5. 
8.3.2 The Commission has custody of the Final Fair Fund and shall retain 
control of the assets of the Final Fair Fund.  As set forth above, ¶2.5, 
all components of the Final Fair Fund are currently deposited at 
Treasury.   
8.3.2.1 Upon approval of the Distribution Plan by the Commission, the 
IDC, BFDS, and Deutsche Bank Trust Company Americas 
("DBTCA" or the “Bank”) shall establish an escrow account at 
DBTCA in the name of and bearing the Taxpayer Identification 
Number of the Final Fair Fund (the “Escrow Account”).  The 
escrow agreement (the “Escrow Agreement”) must be acceptable 
to the Commission staff and shall provide that the escrowed funds 
be (i) invested as soon as reasonably possible in AAA- rated 
Money Market Mutual Funds registered under the Investment Act 
of 1940 (“Investment Act”) that invest in short term U.S. Treasury 
securities and obligations backed by the full faith and credit of the 
U.S. Government; and (ii) distributed only in accordance with the 
validated Issue List described below, ¶8.4.1, except as provided 
herein with respect to taxes.  Any and all taxes payable on account 
of income earned by the money in the escrow account shall be 
timely paid from funds in the escrow account, and the escrow 
agent is expressly authorized and directed to work with the IDC, 
 
13 
 

BFDS, and the Tax Administrator (defined below, ¶8.12.1) to 
make such payments. 
8.3.2.2 Upon approval of the Distribution Plan by the Commission, the 
IDC, BFDS, and the Bank shall further establish a controlled 
disbursement account in the name of and bearing the Taxpayer 
Identification Number of the Final Fair Fund (the “Distribution 
Account”).  All funds will remain in the Escrow Account pursuant 
to the Escrow Agreement until needed to satisfy a presented check 
or wire instruction.  At that time, and subject to the controls set 
forth below, the amount needed to satisfy any presented check will 
be transferred to the Distribution Account and immediately paid 
out.  For any payment to be made by wire instruction, and subject 
to the controls set forth below, funds will be paid by the Escrow 
Agent from the Escrow Account in accordance with written 
instructions provided to the Escrow Agent by parties authorized by 
the Escrow Agreement. 
8.3.2.3 BFDS shall be the signer on the Distribution Account, supervised 
by Dr. Lehn and subject to the continuing jurisdiction and control 
of the Commission.  BFDS shall authorize the Bank to provide 
information on the Escrow Account and the Distribution Account 
to the Tax Administrator.  Under the supervision of the IDC, and at 
the direction of BFDS, the Bank shall use the assets and earnings 
of the Final Fair Fund to provide payments to eligible 
accountholders and to provide the Tax Administrator (defined 
below, ¶8.12.1) with assets to pay, as appropriate, tax liabilities 
and tax compliance fees and costs.  The Escrow Account shall be 
invested in AAA- rated Money Market Mutual Funds further 
described above, ¶8.3.2.1, of a type and term necessary to meet the 
cash requirements of the payments to eligible accountholders, tax 
obligations, and fees. 
8.3.2.4 The Bank has provided Dr. Lehn with an attestation that all funds 
in the Escrow Account and the Distribution Account will be held 
for this Distribution Plan and that the Bank will not place any lien 
or encumbrance of any kind upon the funds.  All interest earned on 
the monies will inure to the benefit of investors except as 
otherwise provided in the Orders or herein.  All costs associated 
with the Escrow Account and the Distribution Account will be 
borne exclusively by one or more of the Respondents, in 
accordance with the Orders.  Upon the Bank’s receipt of funds 
from the Treasury, the Bank shall promptly deposit the funds into 
the Escrow Account.   
 
14 
 

8.3.3 BFDS maintains and will continue to maintain until termination of the 
Final Fair Fund, a Financial Institutions (FI) Bond and errors and 
omissions insurance coverage.  The financial strength of the primary 
insurers, as of the most recent renewal of the coverage, was rated “A+” 
by A.M. Best.  The FI Bond provides protection against employee 
dishonesty, forgery or fraudulent alteration of securities, and electronic 
and computer crime exposures, which include losses due to transfer, 
payment or delivery of funds as a result of fraudulent input, 
preparation or modification of computer instructions, data or 
fraudulent electronic transmissions or communications.  BFDS’s 
professional liability insurance protects against errors and omissions 
committed by employees of BFDS in the course of their performance 
of professional services.  Documentation of coverage has been 
provided to the assigned SEC staff for review and that coverage has 
been deemed “not unacceptable.” 
8.3.4 The Bank maintains, among other insurance, a Financial Institution 
Blanket Bond, and errors and omissions insurance coverage.  The 
financial strength of the primary insurers, as of the most recent 
renewal of the coverage, was rated “A++” and “A+,” respectively, by 
A.M. Best.  The Bank annually assesses the adequacy of its policy 
limits through extensive analysis of historical loss data, exposure to 
loss and internal company controls. The Banks’ limits are reviewed 
annually by the company’s Board of Directors.  Documentation of 
coverage has been provided to the assigned SEC staff for review and 
that coverage has been deemed “not unacceptable.” 
8.4 Additional Distribution Controls.  Following approval of the Distribution Plan, and 
in order to maximize the security of the Final Fair Fund, the following procedures 
will be followed in connection with the Final Fair Fund: 
8.4.1 BFDS will provide to Dr. Lehn a list identifying eligible 
accountholders through multiple identifiers; including name, address, 
and tax identification number (the “Issue List”).  The Issue List will be 
validated by BFDS at the direction of Dr. Lehn through the 
performance of procedures and methodologies chosen by Dr. Lehn.  
The validation will state that the Issue List was compiled in 
accordance with the Distribution Plan and provides all currently 
known information necessary to make distribution to each eligible 
accountholder.  At Dr. Lehn’s direction, BFDS will provide the 
validated Issue List to the Bank.  The validated Issue List will be used 
in connection with the Positive Pay System and other controls 
described below.   
 
15 
 

8.4.2 Dr. Lehn will provide a copy of the validated Issue List to the 
Commission staff with the names, addresses, and tax identification 
numbers of eligible accountholders redacted (the “Redacted Issue 
List”).  Dr. Lehn will certify to the Commission staff that, aside from 
the redactions, the Redacted Issue List is identical in all respects to the 
validated Issue List provided to the Bank.  Upon receipt of the 
Redacted Issue List, the Commission staff will, as appropriate, obtain 
authorization from the Commission or its delegate to disburse.  
8.4.3 Upon authorization by the Commission, the Commission staff will 
direct the release of the Final Fair Fund from Treasury to the Escrow 
Account for distribution as provided herein.   
8.4.4 In connection with each instance of release of funds to the Escrow 
Account in accordance with ¶8.4.10, below, Dr. Lehn, Commission 
staff, and BFDS will establish a set “Mailing” date, or date on which 
BFDS will transmit all checks or wires to eligible accountholders 
intended to be funded with the released funds.   
8.4.5 In connection with each instance of release of funds in accordance 
with ¶8.4.10, below, the Commission staff will direct that the funds be 
released to the Escrow Account on the day before the agreed-upon 
mailing date.  The staff’s direction will be based upon the Redacted 
Issue List and the representation by BFDS that all amounts intended to 
be funded with the released funds will be transmitted to eligible 
accountholders by check or wire on the mailing date.  BFDS will use 
its best efforts to mail and/or transmit distribution checks or wire 
transfers within one (1) business day of the Escrow Account’s receipt 
of the funds.  All efforts will be coordinated to keep the time between 
the receipt of the funding and the transmittal process at a minimum. 
8.4.6 Upon presentation of an outstanding check, and subject to the controls 
set forth below, the exact amount needed to satisfy the presented 
obligation will be transferred from the Escrow Account to the 
Distribution Account and immediately paid out.  As stated in ¶8.3.2.2, 
for any payment to be made by wire instruction, funds will be 
distributed by the Escrow Agent from the Escrow Account in 
accordance with written instructions provided to the Escrow Agent by 
parties authorized by the Escrow Agreement. 
8.4.7 The Positive Pay system, further described in the Positive Pay Guide 
for BFDS dated March 17, 2006, will be used to control distributions 
from the Distribution Account, requiring, among other things, 
confirmation by the Bank that all checks presented for payment match 
 
16 
 

the identifiers and amounts on the validated Issue List prior to 
payment of the presented obligation. 
8.4.8 Upon the Bank’s receipt of a wire instruction, and subject to the 
controls set forth below, the exact amount needed to satisfy the 
presented obligation will be paid by the Escrow Agent from the 
Escrow Account in accordance with the wire instruction.  
8.4.9 Upon the Bank’s receipt of a wire instruction, the Bank will take the 
following steps before the Escrow Agent will release any funds from 
the escrow account: 
8.4.9.1 An administrative employee of the Bank will: 
8.4.9.1.1 Confirm that the payee, amount, and other identifiers on the 
wire instruction match a listed payee and payment on the 
validated issue list;  
8.4.9.1.2 Check that the signatures on the wire instruction are those 
of the persons authorized to issue wire instructions in the 
Escrow Agreement and that the wire instruction is 
otherwise complete and in accordance with the Escrow 
Agreement; and 
8.4.9.1.3 Input the wire instructions into the computer system of the 
Bank.  
 
8.4.9.2 A Bank officer will compare the wire instruction entered by the 
administrative employee into the Bank computer system with the 
original wire instruction prior to approving the wire instruction for 
execution by the Escrow Agent. 
8.4.9.3 Upon the Bank officer’s approval of the wire instruction for 
execution, the Escrow Agent will release the exact amount needed 
to satisfy the presented wire transfer in accordance with the wire 
instruction.   
8.4.10 At no time will there be a larger monetary amount, in the aggregate, in 
the Escrow Account and the Distribution Account, than the amount 
covered by the Bank’s errors and omissions insurance.  BFDS will 
perform a strategic analysis and accountholders eligible to receive 
distributions totaling $125 million dollars will be culled out from the 
total population.  BFDS will request funding for the $125 million 
dollars from the Commission staff.  Once the $125 million has been 
 
17 
 

transferred to the Escrow Account, distribution checks will be 
produced, balanced, samples validated, and mailed to the eligible 
accountholders.  Once $75 million dollars in payments has cleared the 
Escrow Account, an additional payment population totaling no more 
than $75 million dollars will be selected, funding requested and the 
mailing process repeated.  This method will be applied until the total 
population of payments has been processed.  As appropriate, 
outstanding large dollar checks will be monitored and the eligible 
accountholder contacted to determine if assistance can be offered to 
speed the presentment for payment of the outstanding check(s).  
8.4.11 The Bank will reconcile the aggregate amounts of transfers in and out 
of the Escrow Account and the Distribution Account on a daily basis.  
BFDS, on a daily basis and using electronic “view functions” provided 
by the Bank, will confirm that:  the aggregate monetary amount is 
$125 million or less; the Escrow Account and the Distribution 
accounts reconcile; and, with respect to each instrument presented, that 
the proper amounts were released from the appropriate account.  
BFDS will regularly update the IDC as to the reconciliation of the 
Escrow Account and Distribution Account.  Account and will alert the 
IDC and the staff of the Commission as soon as possible under the 
circumstances upon the detection of any irregularity that is not 
resolved in the ordinary course of business.  As appropriate, 
outstanding large dollar checks will be monitored and the eligible 
accountholder contacted to determine if assistance can be offered to 
speed the presentment for payment of the outstanding check(s).  
8.5 Oversight and Costs.  BFDS will assist Dr. Lehn in administering this Distribution 
Plan.  Dr. Lehn has oversight authority over BFDS in the conduct of its duties with 
respect to this engagement and BFDS will keep Dr. Lehn informed as to work on 
this engagement.  Except as otherwise provided herein, the Respondents are 
responsible for all costs associated with the administration of the Distribution Plan, 
divided in the manner specified in the Orders. 
8.6 Procedures for Identifying and Distributing to Eligible Accountholders.  BFDS will 
identify and make distributions to eligible accountholders in several ways, 
depending on the distribution channel through which the investor purchased the 
shares.  The manner in which the accountholders will be identified and paid is as 
follows: 
8.6.1 Direct Purchase Holders: BFDS will use records provided by PBA and 
transfer agency records to identify each Direct Purchase Holder and 
determine the shares held by each on a daily basis.  BFDS will then, in 
accordance with the Distribution Plan and under the supervision of Dr. 
Lehn, determine the distribution amount payable to each eligible 
accountholder. 
 
18 
 

8.6.2 Holders in Omnibus Accounts: Under the supervision of Dr. Lehn, 
BFDS will identify and determine the Distribution Amount for these 
accountholders as follows: 
8.6.2.1 BFDS will use transfer agent records and other PBA resources to 
identify “Omnibus Accounts” 
8.6.2.2 BFDS will, in accordance with the Distribution Plan, determine 
“net” shares held in each Omnibus Account on a daily basis; 
8.6.2.3 Under the supervision of Dr. Lehn, BFDS will calculate the total 
amount due to each Omnibus Account using the methodology set 
forth in the Distribution Plan; 
8.6.2.4 BFDS will engage in an “Outreach Process” by which BFDS will 
contact each “Omnibus Account Brokerage Firm” with provisional 
distributions of $1,000 or more and request individual 
accountholder records (i.e., shares held by each accountholder on 
each day).  The individual accountholder name and address, as 
well as the Tax Identification Number, for each account within the 
Omnibus Account, will be requested from the Omnibus Account 
Brokerage Firm that sold the PBHG Funds in this manner.  The 
accounts that are directly underlying the Omnibus Account will be 
referred to as “Tier 1”. 
8.6.2.5 BFDS will make commercially reasonable efforts to protect the 
privacy and confidentiality of the data, including accountholder 
data, in any and all communications with PBA, by using unique 
account identifiers; 
8.6.2.6 Upon receipt of the individual accountholder records from each 
Omnibus Account Brokerage Firm, BFDS will, in accordance with 
the methodology set forth in the Distribution Plan, calculate the 
amount due each Tier 1 account. 
8.6.2.7 BFDS will maintain records of efforts made to obtain the 
cooperation of the Omnibus Account Brokerage Firm and of the 
responses to these efforts.  After 60 days from the approval of the 
Distribution Plan, the Outreach Process will cease, unless 
otherwise directed by Dr. Lehn.  In the event that an Omnibus 
Account Brokerage Firm cannot or will not provide to BFDS the 
requested individual accountholder records, or fails to provide to 
BFDS the requested records within a reasonable time, BFDS will 
offer to that brokerage firm information to enable the brokerage 
 
19 
 

firm to make the distribution, at its own cost, in accordance with 
the legal duties of the brokerage firm and, if consistent with its 
legal duties, in accordance with this Distribution Plan. 
8.6.3 Holders in Broker Dealer Accounts:  Under the supervision of Dr. 
Lehn, BFDS will determine the Distribution Amount for these 
accountholders as follows: 
8.6.3.1 BFDS will use transfer agent records and other PBA resources to 
identify “Broker Dealer Accounts” 
8.6.3.2 BFDS will, in accordance with the Distribution Plan, determine 
“net” shares held in the Broker Dealer Accounts on a daily basis; 
8.6.3.3 BFDS will, in accordance with the Distribution Plan, calculate the 
total amount due to the Broker Dealer Accounts using the 
methodology set forth above;
 
8.6.3.4 BFDS will engage in an “Outreach Process” by which BFDS will 
contact each “Broker Dealer Firm” with provisional distributions 
of $1,000 or more and request individual accountholder 
identification information.  The individual accountholder name and 
address, as well as the Tax Identification Number, typically the 
individual’s Social Security Number, will be requested for each of 
these accounts.  This information will be requested from the 
Broker Dealer Firms identified in the records of the PBHG Funds 
as having sold the PBHG Funds in this manner.  The accounts that 
are directly underlying the Broker Dealer Accounts will be referred 
to as “Tier 1”.
 
8.6.3.5 BFDS will make commercially reasonable efforts to protect the 
privacy and confidentiality of the data, including accountholder 
data, in any and all communications with PBA, by using unique 
account identifiers;  
8.6.3.6 Upon receipt of the individual accountholder records from each 
Broker Dealer Firm, BFDS will, in accordance with the 
methodology set forth in the Distribution Plan, calculate the 
amount due each Tier 1 account.  
8.6.3.7 BFDS will maintain records of efforts made to obtain the 
cooperation of the Broker Dealer Firm and of the responses to 
these efforts.  After 60 days from the approval of the Distribution 
Plan, the Outreach Process will cease, unless otherwise directed by 
 
20 
 

Dr. Lehn.  In the event that a Broker Dealer Firm cannot or will not 
provide to BFDS the requested individual accountholder records, 
or fails to provide to BFDS the requested records within a 
reasonable time, BFDS will offer to that Broker Dealer Firm 
information to enable the firm to make the distribution, at its own 
cost, in accordance with the legal duties of the firm and, if 
consistent with its legal duties, in accordance with this Distribution 
Plan. 
8.6.4 Embedded Omnibus Accounts
.  To the extent that the accountholder 
identification information provided to BFDS in accordance with 
¶¶8.6.2.4 and 8.6.3.4 in turn identifies “Omnibus Accounts” or 
“Broker Dealer Accounts,” BFDS will proceed as described in 
¶¶8.6.2.6 and 8.6.3.6, above, treating the accountholder as a Tier 1 
purchaser.   
8.6.5 Non-IRA Retirement Accounts
10
 
8.6.5.1 Upon completing its final calculation of the amount to be 
distributed to each eligible Accountholder and associated 
validations, BFDS will use its best efforts to identify any eligible 
Non-IRA retirement plan Accountholders (“NRAs”), whether 
service providers or otherwise, from the accountholder 
identification information provided to BFDS by PBA, transfer 
agency records, or through ¶¶8.6.2.4 and 8.6.3.4.  Subject to 
¶8.6.5.2, and in accordance with ¶¶ 8.3 and 8.4, above, BFDS will 
then use its best efforts to mail and/or transmit distribution checks 
or wire transfers to eligible NRAs.   
8.6.5.2 With respect to eligible NRAs that are entitled to provisional 
distributions of $1,000 or more (“eligible (1000) NRAs”): 
8.6.5.2.1 BFDS, upon completing its final calculation of the amount 
to be distributed to each eligible 
Accountholder and associated validations, will mail notice 
to each eligible (1000) NRA of its respective distribution 
amount.  Such notice will be sent via the United States 
                                                
 
 
10  
“Non-IRA Retirement Account” as used in this Plan means any account of an “employee benefit plan” 
as defined in section 3(3) of ERISA, which is not an Individual Retirement Account (“IRA”), whether 
or not the plan is subject to Title I of ERISA.  Distributions to IRAs will be made in accordance with 
¶¶8.6.1-8.6.4, above.  
 
21 
 

Postal Service to the eligible (1000) NRA’s last know 
address of record. 
8.6.5.2.2 In accordance with the requirements of ¶¶ 8.4.10 and 8.4.11 
above, payments to eligible (1000) NRAs shall be made in 
the second tranche or any tranche subsequent to the second 
tranche in order to allow as much time as practicable under 
the Distribution Plan for such eligible (1000) NRA to 
determine a distribution methodology and, as appropriate, 
notify the plan-level fiduciary of the same.  In addition, 
BFDS shall use best efforts, subject to the requirements of 
¶¶ 8.4.10 and 8.4.11 above, to accomplish distributions to 
all other eligible Accountholders prior to distributing to 
eligible (1000) NRAs. 
8.6.5.3 The eligible NRA shall distribute any monies received pursuant to 
the Distribution Plan in accordance with its fiduciary, contractual, 
and/or legal obligations, and consistent with guidance issued by the 
Department of Labor, if any.   
8.6.5.3.1 Subject to ¶ 8.6.5.3, a service provider (other than the plan 
sponsor, trustee, or other entity authorized to distribute 
monies received pursuant to the Distribution Plan directly 
to Non-IRA retirement plan (“NRP”) participants) may 
allocate the proceeds it receives pursuant to the Distribution 
Plan among the NRPs according to average share or dollar 
balance of the NRPs’ investment in the PBHG Funds 
during the relevant period; and 
8.6.5.3.2 Subject to ¶ 8.6.5.3, the plan sponsor, trustee, or other 
entity authorized to distribute monies received pursuant to 
the Distribution Plan directly to NRP participants: (a) may 
allocate proceeds attributable to a particular NRP to current 
participants pro rata based upon their current total balance 
in the affected NRP, or (b) to the extent permitted by the 
NRP, may use proceeds attributable to a particular NRP to 
pay reasonable expenses of administering the NRP.   
8.6.5.4 In view of, among other things, alternative distribution 
methodologies available to eligible NRAs,
11
 including those set 
forth above, eligible NRAs will not be reimbursed the costs and 
expenses associated with the administration of the Distribution 
Plan.  
                                                
 
 
11
  See Department of Labor Field Assistance Bulletin No. 2006-01 (April 19, 2006).   
 
22 
 

8.7 Subject to ¶ 8.6.5.3, and in accordance with the Orders, the Respondents will bear 
the costs and expenses associated with the administration of the Distribution Plan, 
including the reasonable administrative costs incurred by Omnibus Holder 
Brokerage Firms and Broker Dealer Firms for identifying individual accountholder 
records in connection with the Distribution Plan.   Requests for reimbursement 
from Omnibus Holder Brokerage Firms or Broker Dealer Firms will be paid to the 
extent that such costs are commercially reasonable in light of the amount to be 
distributed to such firms.  All reimbursement requests are subject to final review by 
Dr. Lehn and the Fund Administrator.      
8.8 Data Accuracy.  All brokerage firms providing information to BFDS will be 
required to attest to Dr. Lehn that to the best of their knowledge the information 
they provide is true and accurate. 
8.9 Affected Accountholders.  Even though the Distribution Plan does not anticipate 
soliciting accountholder information directly from affected investors, it can be 
expected that a limited number of accountholders will contact Dr. Lehn, or others, 
to request a distribution.  If this occurs, the information received will be compared 
to the data obtained by Dr. Lehn during the course of the engagement to 1) ensure 
accurate account information and 2) avoid any duplication of payment.  This 
information will be forwarded to BFDS for processing.   
8.10 Notice and Accountholder Communications.  The Distribution Plan will utilize the 
following methods to provide notifications and information to affected 
accountholders.  These services will become active at least by the time of the first 
distribution.  The Commission retains the right to review and approve any material 
posted on the various websites. 
8.10.1 PBA Website.  PBA will maintain a PBHG Fund website that will 
provide all affected accountholders of the PBHG Funds with regular 
and ongoing updates about the Distribution Plan, including notice of 
the proposed plan, instructions on how to obtain copies of the 
proposed plan, and how to submit comments on the proposed plan to 
the Commission.  The website will provide a link to the Commission’s 
website, which is: 
http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm. 
8.10.2 Notice of a Proposed Plan and Opportunity for Comment by Non-
parties.  Pursuant to the Commission’s Rule of Practice 1103, 17 
C.F.R. §201.1103, notice of the proposed Distribution Plan shall be 
published in the SEC Docket and on the websites listed below.  The 
notice shall specify how copies of the proposed plan may be obtained 
and shall state that persons desiring to comment on the proposed plan 
may submit their views, in writing, to the Commission.  Comments 
received will be publicly available.  Persons should submit only 
information that they wish to make publicly available.  As set forth in 
 
23 
 

the Commission’s Rule of Practice 1106, 17 C.F.R. §1106, other than 
in connection with this comment period, no person shall be granted 
leave to intervene or to participate or otherwise to appear in any 
agency proceeding or otherwise to challenge the Distribution Plan, or 
an order approving, approving with modifications, or disapproving the 
Distribution Plan; or any determination relating to the Distribution 
Plan based solely upon that person's eligibility or potential eligibility 
to participate in a fund or based upon any private right of action such 
person may have against any person who is also a respondent in the 
proceeding. 
• 
http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm 
• 
http://www.pbhgfunds.com/inside/lrc.asp 
8.10.3 Final Approved Plan.  The Final Approved Plan will be posted on the 
following free public web sites:  
• http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm 
• http://www.pbhgfunds.com/inside/lrc.asp 
• http://www.pbafairfundsettlements.com/ 
8.10.4 Frequently Asked Questions.  In addition to the Final Approved Plan, 
a list of “Frequently Asked Questions” (“FAQS”) will be posted on the 
following websites:  
• http://www.pbhgfunds.com/inside/lrc.asp 
• http://www.pbafairfundsettlements.com/ 
8.10.5 Accountholder Call Center.  PBA has contracted with BFDS to operate 
a toll-free accountholder call center.  Accountholders will have the 
option of speaking to an individual, who will be properly trained by 
BFDS using pre- approved scripts to respond to accountholder 
inquiries.  Separate toll free numbers will be created for direct and 
omnibus accountholders.  These numbers will be published in the 
Letter that accompanies the distribution checks. 
8.11 Initial Distribution.  Upon the Commission’s approval, and subject to ¶8.12.4, 
below, Dr. Lehn will direct BFDS to implement the Distribution Plan.  The 
Commission retains jurisdiction over the implementation of the Distribution Plan.  
8.11.1 All payments shall be preceded or accompanied by a communication 
(the “Letter”) that includes, as appropriate: (a) a statement describing 
the distribution; (b) a description of the tax information reporting and 
other related tax matters; (c) a statement that checks will be void after 
 
24 
 

90 days; and (d) the name of a person to contact, to be used in the 
event of any questions regarding the distribution.  Where applicable, 
the Letter also will direct Intermediaries of Embedded Omnibus 
Accounts to distribute any monies received pursuant to the 
Distribution Plan in accordance with their fiduciary, contractual, 
and/or legal obligations, and consistent with guidance issued by the 
Department of Labor, if any.   The Letter or other communication to 
eligible accountholders describing their distributions shall be 
submitted to the assigned Commission staff for review and approval.  
Distribution checks, on their face or in the accompanying mailing, will 
clearly indicate that the money is being distributed from a Commission 
Fair Fund. 
8.11.2 All accountholders whose distribution is less than the taxable threshold 
that includes a taxable component will receive the Letter and their 
distribution checks. 
8.11.3 All accountholders whose distribution exceeds the taxable threshold 
and includes a taxable component will receive the Letter, Form 1099 
(or similar document), and their distribution check.   
8.11.4 It is expected that all distribution checks will be mailed, via the United 
States Postal Service (“USPS”), to the eligible accountholders’ last 
know address of record.  All checks drawn on the Account will bear 
the legend “Void after 90 days.”  A wire transfer may be made in lieu 
of a check payment where efficiencies dictate.  Unless specific 
direction is provided by Dr. Lehn or the Commission staff, checks that 
are not negotiated within the 90-day period will not be honored and 
BFDS will instruct the Bank to refuse payment on those checks.  
8.11.5 BFDS has agreed to provide regular updates and reconciliations to Dr. 
Lehn, and will provide a final reconciliation of all un-distributed funds 
to Dr. Lehn.    
8.12 Tax Issues.  The methods of calculation of each accountholders’ share of the Final 
Fair Fund are intended to result in a payment to each eligible accountholder that 
restores the impaired value of the accountholder’s investment in affected PBHG 
Funds. 
8.12.1 Tax Administrator.  The Commission has appointed Damasco & 
Associates (“Damasco”) as the Tax Administrator of the Final Fair 
 
25 
 

Fund (“Tax Administrator”).
12
  Dr. Lehn, BFDS, and the Respondents 
will cooperate with the Tax Administrator in providing information 
necessary to accomplish the income tax compliance, ruling and advice 
work assigned to the Tax Administrator by the Commission.  The Tax 
Administrator shall be compensated by the Respondents in accordance 
with the Orders.    
8.12.2 FairFund2 Tax Obligation.  Upon the combination of Fair Fund2 with 
Fair Fund1, described above in ¶2.5., the Tax Administrator will 
prepare a final tax return for Fair Fund2.   
8.12.3 Other Tax Obligations. Dr. Lehn will consult with the Tax 
Administrator regarding the Final Fair Fund’s income tax compliance, 
reporting and withholding obligations, if any.  Dr. Lehn shall work 
with the Tax Administrator to make adequate reserves for tax liability 
and any costs of tax compliance not required to be paid by the 
Respondents.  
8.12.4 IRS Ruling and Estimated Distribution Duration.  No money shall be 
distributed pursuant to the Distribution Plan prior to the receipt of the 
Ruling by the IRS in connection with the Private Letter Ruling 
currently being sought by the Tax Administrator (the "IRS Ruling").  
8.12.4.1 In the event that IRS Ruling does not require reporting of any 
distributions made pursuant to the Distribution Plan; and provided 
that the Commission has approved the Distribution Plan, the period 
for omnibus outreach has expired in accordance with ¶8.6.2.7 and 
¶8.6.3.7 above, and that the Fund Administrator has completed its 
final calculation of the amount to be distributed to each eligible 
accountholder and associated validations, the Fund Administrator 
will use its best efforts to: (i) start the distribution within two 
weeks of the date of its receipt of the IRS Ruling, and (ii) 
complete the distribution within four months of the transfer of the 
final payment population to the Escrow Account in accordance 
with ¶8.4.10.   
8.12.4.2 In the event the IRS Ruling requires reporting of all or a portion of 
the distributions made pursuant to the Distribution Plan; and 
provided that the Commission has approved the Distribution Plan, 
                                                
 
 
12
  See Investment Advisers Act of 1940, Release No. 2458 (12/7/2005) and Investment Company Act of 
1940 Release No. 27181 (12/7/2005) (Fair Fund1); Securities Exchange Act of 1934 Release No. 51341 
(3/9/2005) (Fair Fund2).   
 
26 
 

the period for omnibus outreach has expired in accordance with 
¶8.6.2.7 and ¶8.6.3.7 above, and the Fund Administrator has 
completed its final calculation of the amount to be distributed to 
each eligible accountholder and associated validations, the Fund 
Administrator will use its best efforts to: (i) start the distribution 
within two weeks of the deadline for returning any back-up 
withholding or other tax forms from eligible investors required by 
the IRS Ruling, and  (ii) complete the distribution within four 
months of the transfer of the final payment population to the 
Escrow Account in accordance with ¶8.4.10.   
8.13 Claims Process.  The Final Fair Fund is not being distributed according to a claims-
made process, so the procedures for providing notice and for making and approving 
claims are not applicable.   
8.14 Locating Accountholders.  Returned and/or undelivered mail and checks will be 
handled as follows: 
8.14.1 All mail returned by the USPS for which a new forwarding address has 
been provided by the USPS will be immediately repackaged and sent 
to the new address.  The master database will be updated with the new 
address. 
8.14.2 All mail returned by the USPS for the first time, without a new 
forwarding address, will be coded as returned mail, the check will be 
voided, and current account information forwarded to InfoAge for 
address research.  If a new address is found, that address will be 
updated to the master database and a new check will be issued. If no 
new address is found, the original check will remain voided. 
Additional efforts to identify the addresses of eligible accountholders 
will be conducted as is commercially reasonable in the view of Dr. 
Lehn, where the costs of further research and the amount to be 
distributed will be considered. 
8.14.3 All mail returned by the USPS from a second attempted mailing, for 
which a new forwarding address has been provided by the USPS, will 
be immediately repackaged and sent to the new address. The master 
database will be updated with the new address. 
8.14.4 All mail returned by the USPS from a second attempted mailing, 
without a new forwarding address, will be coded as returned mail and 
the check will be voided.  Additional efforts to identify the addresses 
of eligible accountholders will be conducted as is commercially 
reasonable in the view of Dr. Lehn, where the costs of further research 
and the amount to be distributed will be considered. 
 
27 
 

8.14.5 All uncashed checks returned as undeliverable will be coded as 
“Returned Post Office” (RPO).  These RPO checks will be marked 
“VOID” directly on the check, coded into the settlement database, and 
stored in a secure facility. 
8.15 Special Circumstances.  It is anticipated that distribution checks will be returned to 
BFDS for various reasons, including the death, divorce, incapacitation, bankruptcy, 
or dissolution of the affected eligible accountholder.  BFDS and/or Dr. Lehn will 
resolve and process these distributions on a case-by-case basis.   
8.16 Receipt of Additional Funds.  Fair Fund1 and Fair Fund2 have been deposited at 
Treasury for investment in government obligations and they will receive additional 
funds in the form of interest from these investments and the investments by the 
Bank described above, ¶¶ 8.3.2.1 and 8.3.2.3.  In addition, from time to time, 
persons whom, or entities which, are alleged by the Commission in a separate 
proceeding to have participated in market timing of the PBHG Funds ("Additional 
Funds Proceeding") may enter into settlements with the Commission resulting in an 
order from a court or the Commission; or may be otherwise subject to order(s) of 
the Commission, a court, or other authority; directing them to make payments to 
Fair Fund1 or the Final Fair Fund (“Additional Funds Order”).  Any such payments 
will be deemed, without further analysis by Dr. Lehn, to be intended to compensate 
accountholders in the PBHG Funds for losses suffered in connection with market 
timing in the PBHG Funds for the period spanning June 1998 through December 
2001 ("Additional Funds”).  Dr. Lehn shall distribute the Additional Funds to 
eligible accountholders in accordance with the Distribution Plan, including the 
limitations on distributions of any de minimis amount described in ¶7.8; provided, 
however that: 
8.16.1 Fair Fund1 or the Final Fair Fund receive the Additional Funds prior to 
the final calculation of the amount to be distributed to each eligible 
accountholder ("Distributable Share of Record Owners"); and 
8.16.2  The Additional Funds Order provides that all expenses related to the 
distribution of the Additional Funds shall: 
8.16.2.1  Be borne by the party or parties subject to such Additional Order, 
and such distribution expenses are paid to BFDS as Fund 
Administrator by the party or parties so ordered in advance of the 
final calculation of the Distributable Share of Record Owners; or  
8.16.2.2  Be paid out of the Additional Funds.   
In the event that the Distributable Share of Record Owners has already been calculated 
when the Additional Funds are received or prior to payment in accordance with ¶8.16.2.1, 
 
28 
 

above, Dr. Lehn shall cause the Additional Funds to be distributed to the PBHG Funds in 
accordance with ¶ 7.9, and all costs of such distribution will be borne by PBA.  Any 
distribution of any Additional Funds under the Distribution Plan shall be subject to the 
provisions of the Distribution Plan. 
8.17 Termination of the Final Fair Fund.  Within 20 days after the final distribution of 
uncashed or unclaimed funds, Dr. Lehn will submit to the staff of the Commission 
a letter from a registered public accounting firm with a reconciliation of the Final 
Distribution Amount (the “Final Accounting”).  The Final Fair Fund (and the 
Account) shall terminate effective immediately after the Final Accounting is 
approved by the Commission or its delegate.  Within 10 days of the termination of 
the Final Fair Fund, Dr. Lehn will provide to the staff of the Commission an 
attestation that the Distribution Plan, as approved, has been implemented. 
8.18 Extensions of Deadlines
.  For good cause shown, the Commission staff may extend 
any of the dates and/or time limits set forth in the Distribution Plan. 
8.19 Material Changes in Plan
.  Dr. Lehn will inform the Commission of any material 
changes in the Distribution Plan, and will obtain approval from the Commission 
prior to their implementation.  If material changes are required, the Distribution 
Plan may be amended upon motion of the IDC, the Fund Administrator, or upon 
the Commission’s own motion. 
 
 
Submitted on:  October 6, 2006  By:    ________________________ 
Kenneth Lehn, Ph.D.  
Independent Distribution Consultant 
retained in connection with Pilgrim 
Baxter & Associates, Admin. Proc. 
No. 3-11524 (June 21, 2004).
 
29 
 

 
Table 1 
 
     
Accounts with more than 4 exchanges into Cash Reserve Fund by fund 
(percent of total is in parentheses) 
 
     
Fund Name                                           Number of Accounts     Volume   ( Millions of dollars)
     
Core Growth 66(1%) 293 (0%) 
Emerging Growth 658(11%) 12,760 (10%) 
Focus                                                                     63(1%)                                                                     4                                                                     (0%)                                                                     
Global Technology 37(1%) 1 (0%) 
Growth                                                                 927(15%)                                                                 74,834                                                                 (59%)                                                                 
International                                                           57(1%)                                                           19                                                           (0%)                                                           
Large Cap 80(1%) 133 (0%) 
Large Cap 20 443(7%) 1,239 (1%) 
Large Cap Growth 155(3%) 1,855 (1%) 
Limited                                                                   27(0%)                                                                   40                                                                   (0%)                                                                   
Mid-Cap                                                                 93(2%)                                                                 65                                                                 (0%)                                                                 
New Opportunities 281(5%) 60 (0%) 
Select Growth 903(15%) 8,015 (6%) 
Small-Cap                                                              95(2%)                                                              434                                                              (0%)                                                              
Strategic Small 51(1%) 73 (0%) 
Technology & Comm. 2,063(34%) 26,645 (21%) 
     
Total                                                                  5,999(100%)                                                                  126,470                                                                  (100%)                                                                  
 
 
30 
 

 
Table 2  
       
Accounts with more than 4 exchanges into Cash Reserve Fund by quarter
(percent of total is in parentheses)  
       
Year Quarter  Number of Accounts Volume (Millions of Dollars) 
       
1998                       Q2                                              150(3%)                       319                       (0%)                       
1998                       Q3                                              145(2%)                       952                       (1%)                       
1998                       Q4                                              131(2%)                       1,247                       (1%)                       
1999                       Q1                                              162(3%)                       2,177                       (2%)                       
1999                       Q2                                              185(3%)                       2,701                       (2%)                       
1999                       Q3                                              210(4%)                       4,209                       (3%)                       
1999                       Q4                                              211(4%)                       3,980                       (3%)                       
2000                       Q1                                              542(9%)                       9,381                       (7%)                       
2000                       Q2                                              663(11%)                       15,560                       (12%)                       
2000                       Q3                                              654(11%)                       16,953                       (13%)                       
2000                       Q4                                              615(10%)                       14,177                       (11%)                       
2001                       Q1                                              641(11%)                       13,298                       (11%)                       
2001                       Q2                                              712(12%)                       17,027                       (13%)                       
2001                       Q3                                              671(11%)                       13,833                       (11%)                       
2001                       Q4                                              307(5%)                       10,655                       (8%)                       
       
Total    5,999(100%) 126,470 (100%) 
 
 
31 
 

 
 
32 
ays
12345678910
Table 3 
Regression of Net Equity Purchases on Frequent Tr
aders' Cumulative Cashflow and Other Cashflow 
 
 
 
 
 
 
 
 
 
 
 
Panel A: Emerging Growth Fund 
 
 
 
 
 
 
 
 
 
 
 
Period: 1998 - 1999 
 
 
 
 
 
 
 
 
 
 
 
Number of D 
 
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.043
-0.036
0.013
0.008
0.008     
0.009
0.006
-0.005
0.010
0.013
t-statistic                                                                   
-1.70
-1.53
0.54
0.35
0.35                                                                   
0.37
0.26
-0.20
0.43
0.60
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Flow Beta 
-0.154
-0.005
0.030
0.073
0.082     
0.047
0.043
0.060
0.072
0.061
t-statistic                                                                   
-1.84
-0.07
0.49
1.33
1.62       
1.02
1.02
1.50
1.92
1.71
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period:  2000 - 2001 
 
 
 
 
 
 
 
 
 
 
 
Number of D 
ays
12345678910
 
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.020
-0.018
-0.005
0.008
0.008     
0.003
-0.008
-0.001
-0.006
0.010
t-statistic                                                                   
-1.08
-1.15
-0.33
0.55
0.54                                                                   
0.23
-0.55
-0.08
-0.45
0.74
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.085
4.85
  
Other Flow Beta 
0.065
0.074
0.100
0.098
0.107     
0.102
0.083
0.095
0.093
t-statistic                                                                    
1.30
1.83
2.85
3.17
3.86       
4.11
3.63
4.62
4.94
 

 
 
33 
 
Table 3 (cont'd) 
Regression of Net Equity Purchases on Frequent Tr
aders' Cumulative Cashflow and Other Cashflow 
 
 
 
 
 
 
 
 
 
 
 
Panel B: Growth Fund 
 
 
 
 
 
 
 
 
 
 
 
Period: 1998 - 1999 
 
 
 
 
 
 
 
 
 
 
 
Number of Days 
1
2
3
4 
5
6
7
8
9
10
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.041
-0.
115
-0.035
-0.066      
-0.027
0.005
0.016
0.060
0.069
0.011
t-statistic                                                                    
-0.71
-2.31
-0.67
-1.28                                                                    
-0.50
0.09
0.30
1.15
1.36
0.22
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Flow Beta 
0.013
0.033
0.041
0.063 
0.071
0.063
0.057
0.053
0.058
0.059
t-statistic                                                                     
0.19
0.71
1.10
1.93         
2.43
2.37
2.34
2.30
2.69
2.87
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period:  2000 - 2001 
 
 
 
 
 
 
 
 
 
 
 
Number of Days 
1
2
3
4 
5
6
7
8
9
10
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.036
-0.018
0.005
0.016       
0.009
0.005
0.003
0.000
0.001
0.007
t-statistic                                                                    
-3.11
-1.74
0.45
1.59                                                                    
0.89
0.49
0.26
-0.03
0.14
0.73
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.138
5.22
  Other Flow Beta 
0.375
0.359
0.322
0.258       
0.231
0.211
0.188
0.163
0.153
t-statistic                                                                     
2.76
3.83
4.54
4.57         
4.90
5.23
5.29
5.13
5.33
 

 
 
34 
ays
12345678910
 
Table 3 (cont'd) 
Regression of Net Equity Purchases on Frequent Tr
aders' Cumulative Cashflow and Other Cashflow 
 
 
 
 
 
 
 
 
 
 
 
Panel C: Select Growth Fund 
 
 
 
 
 
 
 
 
 
 
 
Period: 1998 - 1999 
 
 
 
 
 
 
 
 
 
 
 
Number of D 
 
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.309
-0.279
0.397
0.220
0.159     
-0.045
0.297
0.470
0.078
-0.064
t-statistic                                                                
-1.32
-1.46
2.25
1.21
0.88                                                                
-0.24
1.75
2.77
0.45
-0.36
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Flow Beta 
1.063
1.001
0.894
0.868
0.709 
0.613
0.537
0.472
0.406
0.371
t-statistic                                                                 
3.30
5.14
6.37
7.88
7.70         
7.75
7.73
7.54
7.05
7.03
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period:  2000 - 2001 
 
 
 
 
 
 
 
 
 
 
 
Number of D 
ays
12345678910
 
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.125
-0.005
-0.003
-0.056
-0.003       
0.006
-0.007
-0.017
-0.011
-0.004
t-statistic                                                                
-2.68
-0.13
-0.06
-1.41
-0.09         
0.16
-0.20
-0.47
-0.31
-0.10
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.292
10.99
  Other Flow Beta 
0.589
0.674
0.639
0.579
0.534 
0.459
0.412
0.346
0.310
t-statistic                                                                 
4.07
6.92
8.76
9.98
11.29       
11.20
11.49
10.70
10.62
 

 
 
35 
 
Table 3 (cont'd) 
Regression of Net Equity Purchases on Frequent Tr
aders' Cumulative Cashflow and Other Cashflow 
 
 
 
 
 
 
 
 
 
 
 
Panel D: Technology 
& Communications Fund 
 
 
 
 
 
 
 
 
 
 
 
Period: 1998 - 1999 
 
 
 
 
 
 
 
 
 
 
 
Number of Days 
1
2
3
4
5 
6
7
8
9
10
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.053
-0.006
0.044
0.042
-0.038      
-0.080
0.014
-0.042
-0.016
-0.026
t-statistic                                                                  
-1.38
-0.18
1.24
1.17
-1.05                                                                  
-2.10
0.37
-1.17
-0.47
-0.67
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Flow Beta 
0.078
0.111
0.163
0.137
0.135       
0.111
0.134
0.123
0.119
0.120
t-statistic                                                                   
0.43
0.98
1.86
1.86
2.11         
2.00
2.70
2.73
2.88
3.15
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period:  2000 - 2001 
 
 
 
 
 
 
 
 
 
 
 
Number of Days 
1
2
3
4
5 
6
7
8
9
10
 
 
 
 
 
 
 
 
 
 
 
Frequent Traders' Flow Beta 
-0.026
0.010
0.039
-0.005
0.020       
0.031
0.013
-0.021
0.005
-0.025
t-statistic                                                                  
-0.87
0.40
1.51
-0.20
0.81                                                                  
1.29
0.53
-0.83
0.21
-1.05
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.718
10.84
  Other Flow Beta 
2.145
1.657
1.431
1.296
1.216 
1.082
0.951
0.851
0.789
t-statistic                                                                   
5.52
6.69
7.79
8.87
10.17       
10.62
10.59
10.60
10.93
 

 
 
36 
 
Table 4 
Total Excess Short-Term Profits by Frequent Traders 
(The first four roundtrips each calendar year are excluded.) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                            
                                            
1998                                            
1999                                            
2000                                            
2001                                            
                                            
Total      
FundName      
      
Q2      
Q3      
Q4      
Q1
Q2      
Q3      
Q4      
Q1      
Q2      
Q3      
Q4      
Q1      
Q2      
Q3      
Q4      
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
165.2
0.0
242.8
-0.1
0.3
0.2
0.0
0.0
0.6
1.7
0.2
18.2
0.0
0.0
50.3
4.7
1.5
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Growth  
 
0.5 
-0.7
5.8
0.4
5.0
6.8
22.1
38.
4
22.0
1.0       
-62.4
-21.9
88.9
20.7
38.5
Total                                    
                                    
1.8                                    
-0.5
12.3
3.9
14.2
8.6
68.4
78.2
40.9
15.2     
-122.2
-50.4
108.3
20.4
43.8
Focus                                  
                                  
0.0                                  
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                                  
0.0
0.0
0.0
0.0
0.0
New Opportunity 
 
0.0 
0.0
0.0
0.0
0.0
0.0
0.1
0.0
-0.1
0.0 
0.0
0.0
0.0
0.0
0.0
Small-Cap                           
                           
0.0                           
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                           
0.0
-0.1
0.1
0.3
0.0
Limited                                 
                                 
0.0                                 
0.0
0.0
0.0
0.0
0.0
0.1
0.1
0.0
0.0                                 
0.0
0.0
0.0
0.0
0.0
Technology & Comm. 
0.6 
0.5
2.6
2.0
5.1
-2.0
30.8
18.1
9.6
7.6 
-44.5
-20.3
6.9
1.3
0.0
Large Cap 
 
0.0 
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0 
0.0
0.0
0.0
0.0
0.0
Strategic Small 
 
0.0 
0.0
0.0
0.0
0.1
0.1
0.0
0.0
0.0
0.0 
-0.1
0.0
0.0
0.0
0.0
International                        
                        
0.0                        
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                        
0.0
0.0
0.0
0.0
0.0
Large Cap Growth 
 
0.0 
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0 
0.0
-0.2
0.0
-1.1
1.9
Core Growth 
 
0.0 
0.0
0.4
0.4
0.4
0.3
0.1
0.1
-0.1
0.0 
0.0
0.0
0.0
0.0
0.0
Emerging Growth 
 
0.6 
-0.4
3.6
1.0
3.5
3.3
11.1
14.4
2.5
1.0 
-1.9
-2.3
10.7
3.0
0.0
Global Technology 
 
0.0 
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0 
0.0
0.0
0.0
0.0
0.0
Mid-Cap                               
                               
0.0                               
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                               
0.0
0.0
0.0
0.0
0.0
Select Growth 
 
0.0 
0.0
0.0
0.0
0.0
0.0
2.6
4.6
7.3
5.4 
-12.5
-4.0
1.7
-3.8
3.4
Large Cap 20 
 
0.0 
0.1
-0.1
0.0
0.0
0.0
1.4
2.5
-0.1
0.2 
-0.8
-1.6
-0.1
-0.1
0.0
 

 
 
37 
 
Table 5 
Total Excess Short-Term Profits by Frequent Traders In Percentage Terms 
(The first four roundtrips each calendar year are excluded.) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                    
                                    
1998                                    
1999                                    
2000                                    
2001                                    
                                    
Total      
FundName      
      
Q2      
Q3      
Q4      
Q1      
Q2      
Q3      
Q4      
Q1      
Q2      
Q3      
Q4      
Q1      
Q2      
Q3      
Q4      
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.0%0.0%
0.1%0.0%
20.7%
0.0%
0.0%
0.1%
0.7%0.0%
68.1%
100.0%
0.6%
0.3%
0.1%
1.9%
7.5%
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth 
 
0.3% 
-0.1% 
1.5%
0.4%
1.5%
1.4%
4.6%
5.9%
1.0%  
0.4%
-0.8
%
-0.9%
4.4%
1.2%
0.0%
Focus                          
                          
0.0%                          
0.0%                          
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Large Cap 
 
0.0% 
0.0% 
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Limited                        
                        
0.0%                        
0.0%                        
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Mid-Cap                      
                      
0.0%                      
0.0%                      
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Global Technology 
 
0.0% 
0.0%  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Growth  
 
0.2% 
-0.3% 
2.4%
0.2%
2.1%
2.8%
9.1%
15.8%
9.1%  
0.4%
-25.7%
-9.0%
36.6%
8.5%
15.9%
New Opportunity 
 
0.0% 
0.0% 
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
-0.1% 
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Strategic Small 
 
0.0% 
0.0% 
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0% 
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Total                            
                            
0.7%                            
-0.2%                            
5.1%
1.6%
5.8%
3.5%
28.2%
32.
2%
16.9%  
6.2%
-50.3%
-20.8%
44.6%
8.4%
18.0%
Core Growth 
 
0.0% 
0.0% 
0.2%
0.2%
0.2%
0.1%
0.0%
0.1%
0.0%  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
International                
                
0.0%                
0.0%                
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%  
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Large Cap Growth 
 
0.0% 
0.0% 
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0% 
0.0%
0.0%
-0.1%
0.0%
-0.5%
0.8%
Large Cap 20 
 
0.0% 
0.0% 
0.0%
0.0%
0.0%
0.0%
0.6%
1.0%
-0.1%  
0.1%
-0.3%
-0.6%
0.0%
0.0%
0.0%
Small-Cap                   
                   
0.0%                   
0.0%                   
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%  
0.0%
0.0%
-0.1%
0.0%
0.1%
0.0%
Technology & Comm. 
0.3% 
0.2% 
1.1%
0.8%
2.1%
-0.8%
12.7%
7.4%
3.9%  
3.1%
-18.3%
-8.4%
2.8%
0.6%
0.0%
Select Growth 
 
0.0% 
0.0% 
0.0%
0.0%
0.0%
0.0%
1.1%
1.9%
3.0%  
2.2%
-5.2%
-1.7%
0.7%
-1.6%
1.4%
 

 
 
38 
 
Table 6 
The Distribution of the Settlement Proceeds Across Funds and Quarters 
(The first four roundtrips each calendar year are excluded.) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                            
                                            
1998                                            
1999                                            
2000                                            
2001                                            
                                            
Total      
FundName      
      
Q2      
Q3      
Q4      
Q1
Q2      
Q3      
Q4      
Q1      
Q2      
Q3      
Q4      
Q1      
Q2      
Q3      
Q4      
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.0
250.0
170.1
-0.1
0.3
0.0
0.2
0.2
1.8
0.0
0.7
0.0
4.8
18.7
0.0
51.7
1.6
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Focus                                  
                                  
0.0                                  
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                                  
0.0                                  
0.0
0.0
0.0
0.0
0.0
Total                                    
                                    
1.8                                    
-0.5
12.7
4.0
14.6
8.8
70.4
80.6
42.1    
15.6    
-125.8
-51.9
111.5
21.0
45.1
Growth  
 
0.5 
-0.7
5.9
0.4
5.1
7.1
22.8
39.
6
22.7      
1.1      
-64.2
-22.5
91.6
21.3
39.7
New Opportunity 
 
0.0 
0.0
0.0
0.0
0.0
0.0
0.1
0.0
-0.2      
0.0      
0.0
0.0
0.0
0.0
0.0
Small-Cap                           
                           
0.0                           
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                           
0.0                           
0.0
-0.1
0.1
0.3
0.0
Strategic Small 
 
0.0 
0.0
0.0
0.0
0.1
0.1
0.0
0.0
0.0 
0.0 
-0.1
0.0
0.0
0.0
0.0
Core Growth 
 
0.0 
0.0
0.4
0.4
0.4
0.3
0.1
0.2
-0.1 
0.0 
0.0
-0.1
0.0
0.0
0.0
Limited                                
                                
0.0                                
0.0
0.0
0.0
0.0
0.0
0.1
0.1
0.0                                
0.0                                
0.0
0.0
0.0
0.0
0.0
Large Cap 
 
0.0 
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0 
0.0 
0.0
0.0
0.0
0.0
0.0
Mid-Cap                              
                              
0.0                              
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                              
0.0                              
0.0
0.0
0.0
0.0
0.0
Technology & Comm. 
0.7 
0.5
2.6
2.1
5.3
-2.1
31.7
18.6
9.8 
7.8 
-45.8
-20.9
7.1
1.4
0.0
International                        
                        
0.0                        
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0                        
0.0                        
0.0
0.0
0.0
0.0
0.0
Large Cap Growth 
 
0.0 
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0 
0.0 
0.0
-0.2
0.0
-1.2
2.0
Emerging Growth 
 
0.7 
-0.4
3.7
1.1
3.6
3.4
11.4
14.8
2.6 
1.0 
-1.9
-2.4
11.1
3.1
0.0
Select Growth 
 
0.0 
0.0
0.0
0.0
0.0
0.0
2.7
4.7
7.5 
5.5 
-12.9
-4.1
1.8
-3.9
3.5
Global Technology 
0.0 
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0 
0.0 
0.0
0.0
0.0
0.0
0.0
Large Cap 20 
 
0.0 
0.1
-0.1
0.0
0.0
0.0
1.5
2.6
-0.1 
0.2 
-0.8
-1.6
-0.1
-0.1
0.0
 

ADMINISTRATIVE PROCEEDING 
File No. 3-11524 

 

UNITED STATES OF AMERICA 
Before the 
SECURITIES AND EXCHANGE COMMISSION 

In the Matter of 

PILGRIM BAXTER & 
ASSOCIATES, LTD., 

Respondent. 

 
:
:
:
:
:
:
:
:
: 

PLAN OF DISTRIBUTION 

 

1 Introduction 

1.1 This Distribution Plan sets forth the procedures by which to distribute to investors, 
for the period spanning June 1998 through December 2001, their proportionate 
share of the fund established to compensate such investors for injury they may have 
suffered as a result of market timing in Pilgrim Baxter mutual funds (“PBHG 
Funds”).  The fund is not intended to compensate investors for losses they incurred 
because of fluctuations in securities markets.  

2 The Engagement 

2.1 Kenneth Lehn, Ph.D., has been engaged as the Independent Distribution Consultant 
(“IDC”) in the captioned matter.  In that capacity, Dr. Lehn is to develop a plan to 
distribute a fund collected by the Securities and Exchange Commission 
(“Commission”) pursuant to three Commission orders related to the Commission’s 
finding that, from June 1998 through December 2001, certain accountholders in the 
PBHG Funds engaged in short-term trading of PBHG Funds that violated 
restrictions placed on the annual number of permissible exchanges out of PBHG 
Funds as described in the PBHG Funds’ prospectuses.1 

                                                 
 
1  In the Matter of Pilgrim Baxter & Associates, Ltd., Admin. Proc. File No. 3-11524 (June  21, 2004) 

(“PBA  Order”); In the Matter of Gary L. Pilgrim, Admin. Proc. File No. 3-11739 (Nov. 17, 2004) 
(“Pilgrim Order”); In the Matter of Harold J. Baxter, Admin. Proc. File No. 3-11740  (Nov. 17, 2004) 
(“Baxter Order”) (collectively, the “Orders”). 

  



2.2 The PBA Order required Pilgrim Baxter & Associates, Ltd. (“PBA”),2 investment 
adviser to the PBHG Funds during the period June 1998 through December 2001, 
to pay $90 million, including $40 million in disgorgement and $50 million in a civil 
penalty. 

2.3 The Pilgrim Order required Gary L. Pilgrim (“Mr. Pilgrim”), former President, 
Chief Investment Officer, and Director of PBA, to pay $80 million, including $60 
million in disgorgement and $20 million in a civil penalty. 

2.4 The Baxter Order required Harold J. Baxter (“Mr. Baxter”), former Chief Executive 
Officer and Chairman of the Board of Directors of PBA, to pay $80 million, 
including $60 million in disgorgement and $20 million in a civil penalty.  

2.5 Pursuant to the Orders, PBA, Mr. Pilgrim, and Mr. Baxter (collectively, the 
“Respondents”) paid a total of $250 million.  The money currently is being held as 
follows: 

2.5.1 $90 million in escrow in a Fair Fund3 maintained in connection with 
the PBA Order by the United States Department of the Treasury, 
Bureau of Public Debt (“Treasury”), earning interest through 
investment in short-term U.S. Treasury securities with maturities not 
to exceed six months (“Fair Fund1”).  All interest earned will inure to 
the benefit of investors, except as otherwise provided in the Orders. 

2.5.2 $160 million in escrow in a Fair Fund maintained in connection with 
the Pilgrim Order and the Baxter Order by the Treasury, earning 
interest through investment in short-term U.S. Treasury securities with 
maturities not to exceed six months (“Fair Fund2”).  All interest 
earned will inure to the benefit of investors, except as otherwise 
provided in the Orders. 

Fair Fund1 and Fair Fund2 each have separate taxpayer identification numbers.  Prior to 
the establishment of the bank accounts referenced below, ¶¶8.3.2.1-8.3.2.2., and 
consistent with the Orders, which contemplate one distribution, Fair Fund2 (including 
any interest or earnings thereon) will be transferred to Fair Fund1.  The aggregated 
account (including any interest or earnings thereon), referenced herein as the “Final Fair 
Fund,” will be in the name and bearing the taxpayer identification number of Fair Fund1.        

2.6 As the IDC, Dr. Lehn has been asked to develop a Distribution Plan for the 
distribution of the Final Fair Fund according to a methodology developed in 

                                                 
 
2  Pilgrim Baxter & Associates, Ltd. has since changed its name to Liberty Ridge Capital, Inc (“LRC”).  

The entity is referenced herein, in short form, as “PBA”. 
3  “Fair Fund” as defined in Section 308(a) of the Sarbanes Oxley Act of 2002.  

 2 
 



consultation with PBA and acceptable to the staff of the Commission and the 
independent Trustees of the affected PBHG Funds (the “Distribution Plan”).  The 
Distribution Plan is to “provide for investors to receive, from the monies available 
for distribution, in order of priority, (i) their proportionate share of losses suffered 
by the fund due to market timing, and (ii) a proportionate share of advisory fees 
paid by funds that suffered such losses during the period of such market timing.”4 

2.7 In completing this engagement, Dr. Lehn has been guided by the terms of the 
Orders and by the following assumptions.  These assumptions are made solely for 
the purpose of developing the Distribution Plan and, for that sole purpose, are 
agreeable to the Commission, counsel for PBA, and to Dr. Lehn.  These 
assumptions include the following: 

2.7.1 At all relevant times, the PBHG Funds’ prospectuses limited accounts 
to four exchanges from a PBHG Fund into the PBHG Cash Reserves 
Fund during each calendar year. 

2.7.2 Market timing consists of short-term roundtrip exchanges from  (into) a 
PBHG fund into (from) the PBHG Cash Reserve Fund by any one 
account in excess of the four exchange annual limit5 disclosed in the 
PBHG Funds’ prospectuses.6 

2.7.3 Any losses suffered by PBHG Funds due to market timing are those 
associated with short-term roundtrip exchanges in excess of the four-
exchange limit per PBHG Fund per calendar year. 

2.8 This Distribution Plan relies on the findings in the Orders and the assumptions set 
forth above, and makes no independent assessment as to the legality of the market 
timing in PBHG Funds.  As a result, the estimated dilution losses associated with 
market timing in PBHG Funds, as presented herein, are not intended to be, nor 
should they be interpreted to be, an estimate of damages associated with illegal 

                                                 
 
4  PBA Order at ¶ III.37.a. 
5  To identify short-term roundtrip exchanges, in the empirical analysis that follows Dr. Lehn restricts the 

corresponding exchanges from and into the PBHG Cash Reserve Fund to those for which the time 
difference is no more than 30 calendar days.  Dr. Lehn has replicated the analysis by extending the time 
difference between exchanges from and into the PBHG Cash Reserve Fund to 60 calendar days.  The 
empirical results do not change significantly when short-term roundtrip exchanges are identified in this 
way. 

6  This assumption encompasses more than 99.5% of the value of all trades by accounts represented to be 
associated with the "New York Broker" referred to in Section III.4 of the PBA Order, and reflects 100% 
of the value of all trades by accounts represented to be associated with the "hedge fund family" referred 
to in Section III.4 of the PBA Order. 

 3 
 



timing in PBHG Funds.  Rather, the estimated dilution losses were calculated as a 
means to allocate to investors, as compensation for losses suffered by the PBHG 
Funds, a proportionate share of the fixed settlement payments made by the 
Respondents, together with accrued interest. 

2.9 It is the view of Dr. Lehn, the methodology described herein constitutes a fair and 
reasonable allocation of the Final Fair Fund in the context of the captioned matter. 

3 Qualifications 

3.1 Dr. Lehn is the Samuel A. McCullough Professor of Finance in the Katz School of 
Business at the University of Pittsburgh.  He teaches graduate level courses in 
finance, including courses on business valuation, corporate governance, and 
corporate restructuring.  He also teaches a finance course for law students in the 
School of Law at the University of Pittsburgh.  His research, primarily in the field 
of corporate finance, has been published in leading academic journals in finance 
and economics, including the Journal of Financial Economics, Journal of Finance, 
Journal of Political Economy, American Economic Review, and the Journal of Law 
and Economics. 

3.2 Dr. Lehn served as Chief Economist at the Securities and Exchange Commission 
during 1987 to 1991.  He also served as Deputy Chief Economist at the 
Commission during 1984 to 1985.  In these capacities, Dr. Lehn worked on 
numerous matters involving mutual funds with the Division of Investment 
Management and the Division of Enforcement.  Since leaving the Commission in 
1991, Dr. Lehn has testified on behalf of the Commission and the Department of 
Justice in many civil and criminal cases involving alleged violations of U.S. 
securities laws.  He also has testified many times in private litigation involving 
alleged violations of securities laws. 

3.3 He received a B.A. in economics from Waynesburg College in 1975, an M.A. in 
economics from Miami University in 1976, and a Ph.D. in economics from 
Washington University in 1981.   

4 Representations 

4.1 To the best of his knowledge, Dr. Lehn has received full cooperation from the 
Respondents, including access to data and individuals as requested. 

4.2 Several people at Cornerstone Research have assisted Dr. Lehn in developing this 
Distribution Plan, including Jamie Meehan, Slava Karguine, and Yingcong Lan of 
Cornerstone Research.  All work in this matter has been done under Dr. Lehn’s 
direction. 

4.3 Dr. Lehn has never been employed by PBA.  Under the terms of the PBA Order, 
Dr. Lehn agrees that, for the period of this engagement and for a period of two 
years from completion of this engagement, he will not enter into any employment, 

 4 
 



consultant, or other professional relationship with PBA or “any of its present or 
former affiliates, directors, officers, employees, or agents acting in their capacity as 
such.” 

4.4 Pursuant to the terms of the PBA Order, Cornerstone Research and/or its 
representatives set forth above will not, without prior written consent of the 
independent Trustees of the PBHG Funds and the staff of the Commission, enter 
into any employment, consultant, attorney-client, auditing or other professional 
relationship with PBA, now LRC, or any of its present or former affiliates, 
directors, officers, employees, or agents acting in their capacity as such for the 
period of this engagement and for a period of two years after this engagement. 

4.5 The conclusions Dr. Lehn has reached in this matter should be viewed as specific to 
this engagement and to the facts of this case, and may or may not apply elsewhere. 

5 Background 

5.1 In the Orders, the Commission found that the Respondents violated, variously, 
directly and/or indirectly, Section 17(a) of the Securities Act of 1933; Section 10(b) 
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; Section 34(b) 
of the Investment Company Act of 1940; and Sections 204A, 206(1), and 206(2) of 
the Investment Advisers Act of 1940.  None of the Respondents admitted or denied 
any of the Commission’s findings in the Orders. 

5.2 The Commission found, among other things, that contrary to the disclosures made 
in the prospectuses of all PBHG Funds since at least 1996, PBA, acting through 
Mr. Pilgrim and Mr. Baxter, allowed various accountholders to engage in 
transactions that violated the PBHG Funds’ prospectus disclosures from at least 
June 1998 through December 2001.  Specifically, the PBHG Funds’ prospectuses 
disclosed that investors were limited to not more than four exchanges per year into 
the PBHG Cash Reserves Fund from any other PBHG Fund.  Furthermore, the 
prospectuses did not indicate that there would be any exceptions to this policy.  The 
Commission found, in relevant part, that PBA, acting through Mr. Pilgrim and Mr. 
Baxter, allowed various accountholders to make more than four exchanges per year 
into the PBHG Cash Reserves Fund from other PBHG Funds. 

5.3 As stated above, the Respondents entered into separate agreements with the 
Commission, culminating in the Orders.7  Under the terms of the Orders, the three 
defendants collectively agreed to make a total settlement payment of $250 million 
($90 million by PBA and $80 million each by Mr. Pilgrim and Mr. Baxter), 
including $160 million in disgorgement ($40 million by PBA and $60 million each 

                                                 
 
7    Simultaneous with their settlement with the Commission, the Respondents settled related litigation with 

the New York Attorney General. N.Y. v. Pilgrim Baxter & Associates, Ltd., et al., Index No. 
403728/2003 (N.Y. County).    

 5 
 



by Mr. Pilgrim and Mr. Baxter) and $90 million in civil penalties ($50 million by 
PBA and $20 million each by Mr. Pilgrim and Mr. Baxter).  

5.4 Pursuant to the PBA Order, Dr. Lehn was retained by PBA in September 2004 to 
develop a plan for distributing its $90 million settlement payment to accountholders 
in PBHG Funds who may have been affected by the alleged market timing 
described in the Order.  After Mr. Pilgrim and Mr. Baxter settled with the 
Commission in November 2004, Dr. Lehn was asked to specifically include their 
collective payment of $160 million in the Distribution Plan.   

5.5 Accountholders purchased shares in the PBHG Funds through one of three 
distribution channels.  Each distribution channel presents unique challenges to the 
Distribution Plan, and the manner of distribution to each channel is described 
herein. 

5.5.1 Direct Purchase Holders – Certain purchasers bought their shares 
directly through the distributor for the PBHG Funds by submitting an 
application with payment to either a third party transfer agent or to a 
PBA affiliated servicing company. 

5.5.2 Holders in Omnibus Accounts – Other purchasers bought their shares 
through brokerage firms that functioned as the accountholder of 
record.  Under this structure, the brokerage firm provided to the 
transfer agent, on a daily basis, customer transaction data concerning 
the number of shares purchased and sold by all customers on an 
aggregate basis.  Specific information, such as a Tax Identification 
Number for each customer or account, was not provided. 

5.5.3 Holders in Broker Dealer Accounts - Other purchasers bought their 
shares through brokerage firms that, for each account, provided to the 
transfer agent a unique identifier and information concerning the 
number of shares each unique identifier purchased or sold.  Specific 
information, such as name and address, was not provided. 

5.6 Dr. Lehn sets forth below the methodology used to develop the plan for calculating 
and distributing the Final Fair Fund to accountholders in the PBHG Funds during 
the relevant times.       

6 Methodology Used to Develop Distribution Plan 

6.1 Identifying Market Timers 

6.1.1 To estimate the effect of transactions that allegedly violated the PBHG 
Funds’ prospectus disclosures on accountholders in PBHG Funds, Dr. 
Lehn requested data on all transactions by all accounts in all PBHG 

 6 
 



Funds during June 1998-2001 from PBA.  PBA provided Dr. Lehn 
with a database independently compiled by Deloitte LLP in connection 
with PBA’s settlement discussions with the Commission.  Dr. Lehn 
understands that the Commission and PBA relied on this database in 
arriving at their settlement.   

6.1.2 Upon receiving the Deloitte database, Dr. Lehn identified all accounts, 
other than omnibus accounts, in each PBHG Fund that made more than 
four exchanges in a calendar year into the PBHG Cash Reserve Fund.  
To identify short-term exchanges made by these accounts, Dr. Lehn 
restricted the corresponding exchanges from and into the PBHG Cash 
Reserve Fund to those for which the time difference is no more than 
30 calendar days.  Hereafter, accounts that made more than four 
exchanges in a calendar year into the PBHG Cash Reserve Fund and 
made short-term exchanges are referred to as “market timers.”  

6.1.3 Table 1 shows the number of market timers and the value of all trades 
by market timers in each fund during the period of June 1998 through 
December 2001.  The table shows that the fund with the largest 
number of market timers was the Technology & Communications 
Fund (2,063), followed by the Growth Fund (927), Select Growth 
(903), and Emerging Growth Fund (658).  The fund with the largest 
dollar volume of transactions by these accounts is the Growth Fund 
($75 billion), followed by Technology & Communications ($27 
billion), Emerging Growth ($13 billion), and Select Growth ($8 
billion). 

6.1.4 Similarly, Table 2 lists the number of market timers and the value of 
all trades by market timers across all funds in each quarter during the 
period June 1998 through December 2001.  The table indicates that 
market timing activity was substantially higher during 2000-2001 than 
it was during 1998-1999. 

6.2 Estimating Dilution Losses Associated with Trading by Market Timers 

6.2.1 To estimate the dilution losses incurred by accountholders in PBHG 
Funds resulting from transactions by market timers during June 1998 
through December 2001, Dr. Lehn estimated the total excess short-
term profits earned by market timers in each of the PBHG Funds 
during the period June 1998 through December 2001. 

 7 
 



6.3 Next Day NAV and Realized Profits Approaches 

6.3.1 The amount of dilution losses associated with market timing is related 
to how the fund manager invests the cash flows invested by market 
timers in the fund.  For example, if the fund manager fully invests the 
net cash flows in equity securities and/or equity derivatives the day 
after a frequent trader invests in the fund, and liquidates the equity 
investment the day after the frequent trader exits the fund, then the 
“next day NAV” approach is an appropriate way to estimate dilution 
losses associated with market timing (e.g., see Green and Hodges 
(2000)).  Under this approach, dilution losses are equal to the sum of 
the frequent trader’s first day profits and avoided loss on the day he 
exits the fund. 

6.3.2 Alternatively, in Dr. Lehn’s opinion, if the fund manager holds all of 
the frequent trader’s net cash flows as cash (i.e., if he does not invest 
any of the frequent trader’s cash flows in equity securities), then the 
“realized profits” approach is an appropriate way to estimate dilution 
losses associated with market timing.  Under the realized profits 
approach, dilution losses are equal to the frequent trader’s holding 
period profits. 

6.3.3 A third possibility is that the fund manager invests some of the 
frequent trader’s net cash flows in equity securities and holds the 
remainder in cash.  In this case, dilution losses lie in between the 
dilution losses estimated under the next day NAV approach and the 
realized profits approach. 

6.4 Empirical Analysis of How PBHG Fund Portfolio Managers Invested Cash Flows 
from Market Timers  

6.4.1 To estimate how the PBHG Fund portfolio managers invested the net 
cash flows invested in the funds by market timers, Dr. Lehn estimates 
an ordinary least squares regression of the daily net equity purchases 
for each PBHG Fund.  For each fund, he regresses daily net equity 
purchases on two variables: (i) net cash flows invested by market 
timers and (ii) net cash flows invested by other accounts.  For each 
fund, he estimates ten separate regression models in which net cash 
flows invested by market timers and other accounts are measured as 
lagged variables, with lags of one through ten trading days before the 
day in which the fund’s net equity purchases (i.e., the dependent 
variable) is measured.  Dr. Lehn estimates the regressions over two 
sub-periods: 1998-1999, a period in which equity markets generally 
were rising substantially, and 2000-2001, a period in which equity 
markets generally were declining substantially. 

 8 
 



6.4.2 Table 3 reports the results from estimation of the regression models.  
The results show that across all funds the coefficients on the net cash 
flows invested by market timers fluctuate between being positive and 
negative.  The coefficient on this variable is positive and statistically 
significant at the 0.05 level in only two of the 80 regressions.  The 
results do not allow one to reject the null hypothesis that the portfolio 
managers of the four funds held the market timers’ cash flows as cash 
(i.e., they did not invest any of the market timers’ cash flows in equity 
securities and/or equity derivatives).8 

6.4.3 The results from the empirical analysis reported in Table 3 are 
consistent with a conversation Dr. Lehn had with PBA’s Senior 
Investment Officer, who indicated that it is likely that market timers’ 
cash flows were held as cash, at least by the Growth Fund, which was 
managed by Mr. Pilgrim, and, as seen below, accounts for almost two-
thirds of the aggregate dilution losses incurred by PBHG 
accountholders.  PBA’s Senior Investment Officer did not have an 
opinion as to the likelihood that market timers’ cash flows were held 
as cash in the other PBHG Funds during this period.     

6.4.4 Based on the regression results reported in Table 3, it is Dr. Lehn’s 
opinion that the realized profits approach is the appropriate way to 
estimate the dilution losses associated with market timers in the PBHG 
Funds. 

6.4.5 The conclusion that the market timers’ cash flows were not invested in 
equity securities also implies that accountholders in PBHG Funds 
incurred minimal losses due to transaction costs associated with 
changes to the funds’ portfolios caused by market timers’ transactions 
in PBHG Funds.  As a result, in developing this Distribution Plan, Dr. 
Lehn focuses only on the dilution losses incurred by PBHG 
accountholders due to transactions in PBHG Funds by market timers. 

6.5 Total Excess Short-Term Profits by Market Timers 

6.5.1 To arrive at the percentage of the total settlement proceeds that should 
be distributed to accountholders of each fund on each day over this 
period, Dr. Lehn estimated the total excess short-term profits earned 

                                                 
 
8  Dr. Lehn obtained and examined data on the daily security holdings of the four PBHG Funds that 

account for almost all of the estimated dilution losses (Emerging Growth, Growth, Select Growth, and 
Technology & Communications) during the period of June 1998 through 2001.  He found no evidence 
that the funds “equitized” their portfolios by investing in equity derivatives.    

 9 
 



by market timers in each PBHG Fund on each day during the period 
June 1, 1998 through December 31, 2001.  For reasons described in 
the previous section, he uses the realized profits approach to estimate 
the total excess short-term profits earned by market timers.        

6.5.2 To illustrate how the dilution losses associated with market timing 
vary over time, Table 4 shows the total excess short-term profits 
earned by the market timers in each PBHG Fund in each quarter 
during the second quarter of 1998 through the fourth quarter of 2001.9  
The table shows that market timers earned total excess profits of 
$242.8 million in all PBHG Funds during the period.  The total 
includes excess profits of approximately $14 million in 1998, $95 
million in 1999, $12 million in 2000, and $122 million in 2001. 

6.5.3 The excess profits earned by market timers, and hence, the dilution 
losses incurred by accountholders in PBHG Funds, are highly 
concentrated in three quarters: Q4 1999, Q1 2000, and Q2 2001.  
These three quarters account for approximately $255 million, or 105%, 
of the total excess profits.  The reason that these three quarters account 
for more than 100% of the aggregate dilution losses is that the dilution 
losses incurred by accountholders in PBHG Funds during these 
quarters were offset in part by benefits that the accountholders 
received when the market timers’ cash flows were held as cash during 
periods in which the market was declining in value.          

6.5.4 The table also shows that the excess profits are also highly 
concentrated in four PBHG Funds.  The Growth Fund accounts for 
approximately $165 million, or 68.1%, of the total excess profits, 
followed by the Emerging Growth Fund (approximately $50 million), 
the Technology and Communications Fund (approximately $18 
million), and the Select Growth Fund (approximately $5 million).  
Together, the four funds account for approximately $238 million, or 
98%, of the total excess profits. 

6.5.5 Cross-tabulation of the data reveals that approximately $250 million, 
or 103.1%, of the excess profits earned by market timers in the PBHG 
Funds are accounted for by market timing in the four funds (Growth, 
Emerging Growth, Technology and Communications, and Select 

                                                 
 
9  Dr. Lehn adjusted the profits for accumulation of prejudgment interest.  For its calculation, Dr. Lehn 

applied the interest rate used by the IRS for corporate tax underpayments (Section 6621 of the Internal 
Revenue Code). The interest on the profits lost by a fund in a particular quarter is calculated by 
cumulative application of the IRS quarterly interest rates starting from the quarter when the profits were 
lost and ending December 2001. 

 10 
 



Growth) during the three quarters (Q4 1999, Q1 2000, and Q2 2001).  
Accordingly, accountholders of those four funds during those three 
quarters incurred most of the dilution losses associated with market 
timing in the PBHG Funds. 

7 The Distribution Plan  

7.1 The excess profits earned by market timers in each PBHG Fund on each day during 
the period June 1, 1998 through December 31, 2001 is calculated as a percentage of 
the total excess profits of $242.8 million.  The daily settlement proceeds for each 
fund on each day are then calculated as the percentage on that day times the $250 
million (plus earned interest) in total settlement proceeds.   

7.2 “Accountholders” of each PBHG Fund, including Direct Purchase Holders, Holders 
in Omnibus Accounts and Holders in Broker Dealer Accounts, are entitled to a 
prorated share of their PBHG Funds’ daily settlement proceeds.  The prorated share 
is to be calculated as the percentage of the value of the Fund held by an 
accountholder on a given day times the Fund’s daily settlement proceeds.    

7.3 For example, suppose an accountholder owned 0.1% of the Growth Fund on a day 
when Growth Fund accountholders are entitled to a total of $1 million in settlement 
proceeds.  Under the Distribution Plan, the accountholder would receive $1,000 to 
compensate it for dilution losses associated with market timing in the Growth Fund 
on this day (i.e., 0.001 times $1 million).   

7.4 To illustrate how the proportion of total settlement proceeds to be allocated varies 
over time, Table 5 presents the excess profits earned by market timers in each fund 
in each quarter as a percentage of the total excess profits of $242.8 million.  These 
percentages effectively reflect the proportion of total dilution losses incurred by 
PBHG accountholders because of market timing over the period. 

7.5 To illustrate how the amount of settlement proceeds to which accountholders in 
each fund are entitled varies over time, Dr. Lehn multiplies the quarterly 
percentages in Table 5 by $250 million, the total amount of the settlement proceeds 
before interest.  These calculations, which are contained in Table 6, represent the 
distribution of the settlement proceeds across each PBHG Fund in each quarter 
during Q2 1998 through Q4 2001.  Note that the distribution in a specific quarter 
can be negative because the negative amount (representing benefits to long-term 
accountholders from market timing) is used to offset positive amounts in other 
quarters for other funds.      

7.6 Except as provided in ¶7.7 below, accountholders who engaged in market timing 
will not be eligible for a distribution unless the losses they incurred from market 
timing by other accountholders exceed the losses other accountholders incurred 
from their market timing.  For example, suppose an accountholder engaged in 
market timing that is estimated to have resulted in $1 million of losses for other 

 11 
 



accountholders.  Unless the losses this accountholder incurred from market timing 
by other accountholders exceed $1 million, this accountholder receives no 
distribution.  If the losses this accountholder incurred from market timing by other 
accountholders exceed $1 million, then this accountholder receives a distribution 
that is net of the losses its market timing resulted in for other accountholders.  If, 
for example, this accountholder incurred $1.5 million of losses from market timing 
by other accountholders, then this accountholder receives a distribution of 
$500,000 (i.e., $1.5 million minus $1 million).  

7.7 The Respondents will not be eligible for a distribution under this Distribution Plan.  
In addition, accountholders who, prior to distribution under the Distribution Plan, 
are subject to order(s) of the Commission, a court, or other authority, by settlement 
or otherwise, of which Dr. Lehn has notice, finding them responsible for losses 
suffered by PBHG Funds in connection with the market timing of PBHG Funds 
during the period spanning June 1998 through December 2001, will not be eligible 
for a distribution under the Distribution Plan.    

7.8 Only accountholders with an aggregate prorated share of at least $10 (including 
accounts that have negative aggregate damages) across all funds and quarters are 
eligible to receive a distribution from the Final Fair Fund.  This decision is based 
on the conclusion that it is not cost effective to attempt to distribute amounts of less 
than $10 to individual accounts.  The distribution amount per accountholder will be 
prorated so that the total amount sent to accountholders equals the amount available 
in the Final Fair Fund.   

7.9 Any monies not distributed to individual accounts shall be distributed to the PBHG 
Funds based on the proportion of aggregate excess profits by market timers 
accounted for by each PBHG Fund.  For example, suppose $20 million of the $250 
million is not distributed to accountholders (including both individual and omnibus 
accounts).  Then $13.61 million of the settlement proceeds will be distributed to the 
PBHG Growth Fund (i.e., $20 million times 0.681 (the proportion of aggregate 
excess profits earned by market timers in the Growth Fund)).  

8 Distribution of Funds 

8.1 Fund Administrator.  Boston Financial Data Services (“BFDS”) has been selected 
by Dr. Lehn to serve as Fund Administrator pursuant to Rule 1105 of the 
Commission’s Rules of Practice, 17 C.F.R. §201.1105 (the “Fund Administrator”). 
BFDS, founded in 1973, is a third-party service provider that provides transfer 
agency services to over 145 fund companies.  BFDS has extensive experience in 
both the settlement administration industry (over 11 years) and the mutual fund 
industry (over 30 years).  BFDS will be compensated for its time and expenses by 
one or more of the Respondents in accordance with the terms set forth in the 
Orders.  Under the supervision of Dr. Lehn, BFDS will perform the duties and 
obligations set forth herein, including overseeing the administration of the Final 
Fair Fund; distributing funds from the Final Fair Fund to accountholders in 
accordance with the Distribution Plan; preparing and submitting to the staff in 

 12 
 



accordance with Rule 1105(f) periodic accountings of all monies earned or received 
and all monies spent in connection with the administration of the Distribution Plan; 
and, with Dr. Lehn, submitting a final accounting for approval by the Commission 
and/or its delegate. 

8.2 Limitation on Liability.  The IDC and the Fund Administrator, and/or each of their 
designees, agents and assistants, shall be entitled to rely on any Orders issued in 
this proceeding by the Commission, the Secretary by delegated authority, or an 
Administrative Law Judge, and may not be held liable to any person other than the 
Commission, the Final Fair Fund, Fair Fund1, and Fair Fund2 for any act or 
omission in the course of administering the Distribution Fund, except upon a 
finding in this proceeding that such act or omission is caused by such party's gross 
negligence, bad faith or willful misconduct, reckless disregard of duty, or reckless 
failure to comply with the terms of the Distribution Plan.  This limitation on 
liability clause also applies to any order(s) to distribute additional funds, as further 
described below, ¶8.16.  

8.3 Custody of the Final Fair Fund and Other Security Issues.   

8.3.1 The Final Fair Fund, Fair Fund1, and Fair Fund2 constitute Qualified 
Settlement Funds (“QSF”) under Section 468B(g) of the Internal 
Revenue Code, 26 U.S.C. §468B(g), and related regulations, 26 C.F.R. 
§§1.468B-1 through 1.468B-5. 

8.3.2 The Commission has custody of the Final Fair Fund and shall retain 
control of the assets of the Final Fair Fund.  As set forth above, ¶2.5, 
all components of the Final Fair Fund are currently deposited at 
Treasury.   

8.3.2.1 Upon approval of the Distribution Plan by the Commission, the 
IDC, BFDS, and Deutsche Bank Trust Company Americas 
("DBTCA" or the “Bank”) shall establish an escrow account at 
DBTCA in the name of and bearing the Taxpayer Identification 
Number of the Final Fair Fund (the “Escrow Account”).  The 
escrow agreement (the “Escrow Agreement”) must be acceptable 
to the Commission staff and shall provide that the escrowed funds 
be (i) invested as soon as reasonably possible in AAA- rated 
Money Market Mutual Funds registered under the Investment Act 
of 1940 (“Investment Act”) that invest in short term U.S. Treasury 
securities and obligations backed by the full faith and credit of the 
U.S. Government; and (ii) distributed only in accordance with the 
validated Issue List described below, ¶8.4.1, except as provided 
herein with respect to taxes.  Any and all taxes payable on account 
of income earned by the money in the escrow account shall be 
timely paid from funds in the escrow account, and the escrow 
agent is expressly authorized and directed to work with the IDC, 

 13 
 



BFDS, and the Tax Administrator (defined below, ¶8.12.1) to 
make such payments. 

8.3.2.2 Upon approval of the Distribution Plan by the Commission, the 
IDC, BFDS, and the Bank shall further establish a controlled 
disbursement account in the name of and bearing the Taxpayer 
Identification Number of the Final Fair Fund (the “Distribution 
Account”).  All funds will remain in the Escrow Account pursuant 
to the Escrow Agreement until needed to satisfy a presented check 
or wire instruction.  At that time, and subject to the controls set 
forth below, the amount needed to satisfy any presented check will 
be transferred to the Distribution Account and immediately paid 
out.  For any payment to be made by wire instruction, and subject 
to the controls set forth below, funds will be paid by the Escrow 
Agent from the Escrow Account in accordance with written 
instructions provided to the Escrow Agent by parties authorized by 
the Escrow Agreement. 

8.3.2.3 BFDS shall be the signer on the Distribution Account, supervised 
by Dr. Lehn and subject to the continuing jurisdiction and control 
of the Commission.  BFDS shall authorize the Bank to provide 
information on the Escrow Account and the Distribution Account 
to the Tax Administrator.  Under the supervision of the IDC, and at 
the direction of BFDS, the Bank shall use the assets and earnings 
of the Final Fair Fund to provide payments to eligible 
accountholders and to provide the Tax Administrator (defined 
below, ¶8.12.1) with assets to pay, as appropriate, tax liabilities 
and tax compliance fees and costs.  The Escrow Account shall be 
invested in AAA- rated Money Market Mutual Funds further 
described above, ¶8.3.2.1, of a type and term necessary to meet the 
cash requirements of the payments to eligible accountholders, tax 
obligations, and fees. 

8.3.2.4 The Bank has provided Dr. Lehn with an attestation that all funds 
in the Escrow Account and the Distribution Account will be held 
for this Distribution Plan and that the Bank will not place any lien 
or encumbrance of any kind upon the funds.  All interest earned on 
the monies will inure to the benefit of investors except as 
otherwise provided in the Orders or herein.  All costs associated 
with the Escrow Account and the Distribution Account will be 
borne exclusively by one or more of the Respondents, in 
accordance with the Orders.  Upon the Bank’s receipt of funds 
from the Treasury, the Bank shall promptly deposit the funds into 
the Escrow Account.   

 14 
 



8.3.3 BFDS maintains and will continue to maintain until termination of the 
Final Fair Fund, a Financial Institutions (FI) Bond and errors and 
omissions insurance coverage.  The financial strength of the primary 
insurers, as of the most recent renewal of the coverage, was rated “A+” 
by A.M. Best.  The FI Bond provides protection against employee 
dishonesty, forgery or fraudulent alteration of securities, and electronic 
and computer crime exposures, which include losses due to transfer, 
payment or delivery of funds as a result of fraudulent input, 
preparation or modification of computer instructions, data or 
fraudulent electronic transmissions or communications.  BFDS’s 
professional liability insurance protects against errors and omissions 
committed by employees of BFDS in the course of their performance 
of professional services.  Documentation of coverage has been 
provided to the assigned SEC staff for review and that coverage has 
been deemed “not unacceptable.” 

8.3.4 The Bank maintains, among other insurance, a Financial Institution 
Blanket Bond, and errors and omissions insurance coverage.  The 
financial strength of the primary insurers, as of the most recent 
renewal of the coverage, was rated “A++” and “A+,” respectively, by 
A.M. Best.  The Bank annually assesses the adequacy of its policy 
limits through extensive analysis of historical loss data, exposure to 
loss and internal company controls. The Banks’ limits are reviewed 
annually by the company’s Board of Directors.  Documentation of 
coverage has been provided to the assigned SEC staff for review and 
that coverage has been deemed “not unacceptable.” 

8.4 Additional Distribution Controls.  Following approval of the Distribution Plan, and 
in order to maximize the security of the Final Fair Fund, the following procedures 
will be followed in connection with the Final Fair Fund: 

8.4.1 BFDS will provide to Dr. Lehn a list identifying eligible 
accountholders through multiple identifiers; including name, address, 
and tax identification number (the “Issue List”).  The Issue List will be 
validated by BFDS at the direction of Dr. Lehn through the 
performance of procedures and methodologies chosen by Dr. Lehn.  
The validation will state that the Issue List was compiled in 
accordance with the Distribution Plan and provides all currently 
known information necessary to make distribution to each eligible 
accountholder.  At Dr. Lehn’s direction, BFDS will provide the 
validated Issue List to the Bank.  The validated Issue List will be used 
in connection with the Positive Pay System and other controls 
described below.   

 15 
 



8.4.2 Dr. Lehn will provide a copy of the validated Issue List to the 
Commission staff with the names, addresses, and tax identification 
numbers of eligible accountholders redacted (the “Redacted Issue 
List”).  Dr. Lehn will certify to the Commission staff that, aside from 
the redactions, the Redacted Issue List is identical in all respects to the 
validated Issue List provided to the Bank.  Upon receipt of the 
Redacted Issue List, the Commission staff will, as appropriate, obtain 
authorization from the Commission or its delegate to disburse.  

8.4.3 Upon authorization by the Commission, the Commission staff will 
direct the release of the Final Fair Fund from Treasury to the Escrow 
Account for distribution as provided herein.   

8.4.4 In connection with each instance of release of funds to the Escrow 
Account in accordance with ¶8.4.10, below, Dr. Lehn, Commission 
staff, and BFDS will establish a set “Mailing” date, or date on which 
BFDS will transmit all checks or wires to eligible accountholders 
intended to be funded with the released funds.   

8.4.5 In connection with each instance of release of funds in accordance 
with ¶8.4.10, below, the Commission staff will direct that the funds be 
released to the Escrow Account on the day before the agreed-upon 
mailing date.  The staff’s direction will be based upon the Redacted 
Issue List and the representation by BFDS that all amounts intended to 
be funded with the released funds will be transmitted to eligible 
accountholders by check or wire on the mailing date.  BFDS will use 
its best efforts to mail and/or transmit distribution checks or wire 
transfers within one (1) business day of the Escrow Account’s receipt 
of the funds.  All efforts will be coordinated to keep the time between 
the receipt of the funding and the transmittal process at a minimum. 

8.4.6 Upon presentation of an outstanding check, and subject to the controls 
set forth below, the exact amount needed to satisfy the presented 
obligation will be transferred from the Escrow Account to the 
Distribution Account and immediately paid out.  As stated in ¶8.3.2.2, 
for any payment to be made by wire instruction, funds will be 
distributed by the Escrow Agent from the Escrow Account in 
accordance with written instructions provided to the Escrow Agent by 
parties authorized by the Escrow Agreement. 

8.4.7 The Positive Pay system, further described in the Positive Pay Guide 
for BFDS dated March 17, 2006, will be used to control distributions 
from the Distribution Account, requiring, among other things, 
confirmation by the Bank that all checks presented for payment match 

 16 
 



the identifiers and amounts on the validated Issue List prior to 
payment of the presented obligation. 

8.4.8 Upon the Bank’s receipt of a wire instruction, and subject to the 
controls set forth below, the exact amount needed to satisfy the 
presented obligation will be paid by the Escrow Agent from the 
Escrow Account in accordance with the wire instruction.  

8.4.9 Upon the Bank’s receipt of a wire instruction, the Bank will take the 
following steps before the Escrow Agent will release any funds from 
the escrow account: 

8.4.9.1 An administrative employee of the Bank will: 

8.4.9.1.1 Confirm that the payee, amount, and other identifiers on the 
wire instruction match a listed payee and payment on the 
validated issue list;  

8.4.9.1.2 Check that the signatures on the wire instruction are those 
of the persons authorized to issue wire instructions in the 
Escrow Agreement and that the wire instruction is 
otherwise complete and in accordance with the Escrow 
Agreement; and 

8.4.9.1.3 Input the wire instructions into the computer system of the 
Bank.  

 

8.4.9.2 A Bank officer will compare the wire instruction entered by the 
administrative employee into the Bank computer system with the 
original wire instruction prior to approving the wire instruction for 
execution by the Escrow Agent. 

8.4.9.3 Upon the Bank officer’s approval of the wire instruction for 
execution, the Escrow Agent will release the exact amount needed 
to satisfy the presented wire transfer in accordance with the wire 
instruction.   

8.4.10 At no time will there be a larger monetary amount, in the aggregate, in 
the Escrow Account and the Distribution Account, than the amount 
covered by the Bank’s errors and omissions insurance.  BFDS will 
perform a strategic analysis and accountholders eligible to receive 
distributions totaling $125 million dollars will be culled out from the 
total population.  BFDS will request funding for the $125 million 
dollars from the Commission staff.  Once the $125 million has been 

 17 
 



transferred to the Escrow Account, distribution checks will be 
produced, balanced, samples validated, and mailed to the eligible 
accountholders.  Once $75 million dollars in payments has cleared the 
Escrow Account, an additional payment population totaling no more 
than $75 million dollars will be selected, funding requested and the 
mailing process repeated.  This method will be applied until the total 
population of payments has been processed.  As appropriate, 
outstanding large dollar checks will be monitored and the eligible 
accountholder contacted to determine if assistance can be offered to 
speed the presentment for payment of the outstanding check(s).  

8.4.11 The Bank will reconcile the aggregate amounts of transfers in and out 
of the Escrow Account and the Distribution Account on a daily basis.  
BFDS, on a daily basis and using electronic “view functions” provided 
by the Bank, will confirm that:  the aggregate monetary amount is 
$125 million or less; the Escrow Account and the Distribution 
accounts reconcile; and, with respect to each instrument presented, that 
the proper amounts were released from the appropriate account.  
BFDS will regularly update the IDC as to the reconciliation of the 
Escrow Account and Distribution Account.  Account and will alert the 
IDC and the staff of the Commission as soon as possible under the 
circumstances upon the detection of any irregularity that is not 
resolved in the ordinary course of business.  As appropriate, 
outstanding large dollar checks will be monitored and the eligible 
accountholder contacted to determine if assistance can be offered to 
speed the presentment for payment of the outstanding check(s).  

8.5 Oversight and Costs.  BFDS will assist Dr. Lehn in administering this Distribution 
Plan.  Dr. Lehn has oversight authority over BFDS in the conduct of its duties with 
respect to this engagement and BFDS will keep Dr. Lehn informed as to work on 
this engagement.  Except as otherwise provided herein, the Respondents are 
responsible for all costs associated with the administration of the Distribution Plan, 
divided in the manner specified in the Orders. 

8.6 Procedures for Identifying and Distributing to Eligible Accountholders.  BFDS will 
identify and make distributions to eligible accountholders in several ways, 
depending on the distribution channel through which the investor purchased the 
shares.  The manner in which the accountholders will be identified and paid is as 
follows: 

8.6.1 Direct Purchase Holders: BFDS will use records provided by PBA and 
transfer agency records to identify each Direct Purchase Holder and 
determine the shares held by each on a daily basis.  BFDS will then, in 
accordance with the Distribution Plan and under the supervision of Dr. 
Lehn, determine the distribution amount payable to each eligible 
accountholder. 

 18 
 



8.6.2 Holders in Omnibus Accounts: Under the supervision of Dr. Lehn, 
BFDS will identify and determine the Distribution Amount for these 
accountholders as follows: 

8.6.2.1 BFDS will use transfer agent records and other PBA resources to 
identify “Omnibus Accounts” 

8.6.2.2 BFDS will, in accordance with the Distribution Plan, determine 
“net” shares held in each Omnibus Account on a daily basis; 

8.6.2.3 Under the supervision of Dr. Lehn, BFDS will calculate the total 
amount due to each Omnibus Account using the methodology set 
forth in the Distribution Plan; 

8.6.2.4 BFDS will engage in an “Outreach Process” by which BFDS will 
contact each “Omnibus Account Brokerage Firm” with provisional 
distributions of $1,000 or more and request individual 
accountholder records (i.e., shares held by each accountholder on 
each day).  The individual accountholder name and address, as 
well as the Tax Identification Number, for each account within the 
Omnibus Account, will be requested from the Omnibus Account 
Brokerage Firm that sold the PBHG Funds in this manner.  The 
accounts that are directly underlying the Omnibus Account will be 
referred to as “Tier 1”. 

8.6.2.5 BFDS will make commercially reasonable efforts to protect the 
privacy and confidentiality of the data, including accountholder 
data, in any and all communications with PBA, by using unique 
account identifiers; 

8.6.2.6 Upon receipt of the individual accountholder records from each 
Omnibus Account Brokerage Firm, BFDS will, in accordance with 
the methodology set forth in the Distribution Plan, calculate the 
amount due each Tier 1 account. 

8.6.2.7 BFDS will maintain records of efforts made to obtain the 
cooperation of the Omnibus Account Brokerage Firm and of the 
responses to these efforts.  After 60 days from the approval of the 
Distribution Plan, the Outreach Process will cease, unless 
otherwise directed by Dr. Lehn.  In the event that an Omnibus 
Account Brokerage Firm cannot or will not provide to BFDS the 
requested individual accountholder records, or fails to provide to 
BFDS the requested records within a reasonable time, BFDS will 
offer to that brokerage firm information to enable the brokerage 

 19 
 



firm to make the distribution, at its own cost, in accordance with 
the legal duties of the brokerage firm and, if consistent with its 
legal duties, in accordance with this Distribution Plan. 

8.6.3 Holders in Broker Dealer Accounts:  Under the supervision of Dr. 
Lehn, BFDS will determine the Distribution Amount for these 
accountholders as follows: 

8.6.3.1 BFDS will use transfer agent records and other PBA resources to 
identify “Broker Dealer Accounts” 

8.6.3.2 BFDS will, in accordance with the Distribution Plan, determine 
“net” shares held in the Broker Dealer Accounts on a daily basis; 

8.6.3.3 BFDS will, in accordance with the Distribution Plan, calculate the 
total amount due to the Broker Dealer Accounts using the 
methodology set forth above; 

8.6.3.4 BFDS will engage in an “Outreach Process” by which BFDS will 
contact each “Broker Dealer Firm” with provisional distributions 
of $1,000 or more and request individual accountholder 
identification information.  The individual accountholder name and 
address, as well as the Tax Identification Number, typically the 
individual’s Social Security Number, will be requested for each of 
these accounts.  This information will be requested from the 
Broker Dealer Firms identified in the records of the PBHG Funds 
as having sold the PBHG Funds in this manner.  The accounts that 
are directly underlying the Broker Dealer Accounts will be referred 
to as “Tier 1”. 

8.6.3.5 BFDS will make commercially reasonable efforts to protect the 
privacy and confidentiality of the data, including accountholder 
data, in any and all communications with PBA, by using unique 
account identifiers;  

8.6.3.6 Upon receipt of the individual accountholder records from each 
Broker Dealer Firm, BFDS will, in accordance with the 
methodology set forth in the Distribution Plan, calculate the 
amount due each Tier 1 account.  

8.6.3.7 BFDS will maintain records of efforts made to obtain the 
cooperation of the Broker Dealer Firm and of the responses to 
these efforts.  After 60 days from the approval of the Distribution 
Plan, the Outreach Process will cease, unless otherwise directed by 

 20Dr. Lehn.  In the event that a Broker Dealer Firm cannot or will not 
provide to BFDS the requested individual accountholder records, 
or fails to provide to BFDS the requested records within a 
reasonable time, BFDS will offer to that Broker Dealer Firm 
information to enable the firm to make the distribution, at its own 
cost, in accordance with the legal duties of the firm and, if 
consistent with its legal duties, in accordance with this Distribution 
Plan. 

8.6.4 Embedded Omnibus Accounts.  To the extent that the accountholder 
identification information provided to BFDS in accordance with 
¶¶8.6.2.4 and 8.6.3.4 in turn identifies “Omnibus Accounts” or 
“Broker Dealer Accounts,” BFDS will proceed as described in 
¶¶8.6.2.6 and 8.6.3.6, above, treating the accountholder as a Tier 1 
purchaser.   

8.6.5 Non-IRA Retirement Accounts10 

8.6.5.1 Upon completing its final calculation of the amount to be 
distributed to each eligible Accountholder and associated 
validations, BFDS will use its best efforts to identify any eligible 
Non-IRA retirement plan Accountholders (“NRAs”), whether 
service providers or otherwise, from the accountholder 
identification information provided to BFDS by PBA, transfer 
agency records, or through ¶¶8.6.2.4 and 8.6.3.4.  Subject to 
¶8.6.5.2, and in accordance with ¶¶ 8.3 and 8.4, above, BFDS will 
then use its best efforts to mail and/or transmit distribution checks 
or wire transfers to eligible NRAs.   

8.6.5.2 With respect to eligible NRAs that are entitled to provisional 
distributions of $1,000 or more (“eligible (1000) NRAs”): 

8.6.5.2.1 BFDS, upon completing its final calculation of the amount 
to be distributed to each eligible 
Accountholder and associated validations, will mail notice 
to each eligible (1000) NRA of its respective distribution 
amount.  Such notice will be sent via the United States 

                                                 
 
10  “Non-IRA Retirement Account” as used in this Plan means any account of an “employee benefit plan” 

as defined in section 3(3) of ERISA, which is not an Individual Retirement Account (“IRA”), whether 
or not the plan is subject to Title I of ERISA.  Distributions to IRAs will be made in accordance with 
¶¶8.6.1-8.6.4, above.  

 21 
 



Postal Service to the eligible (1000) NRA’s last know 
address of record. 

8.6.5.2.2 In accordance with the requirements of ¶¶ 8.4.10 and 8.4.11 
above, payments to eligible (1000) NRAs shall be made in 
the second tranche or any tranche subsequent to the second 
tranche in order to allow as much time as practicable under 
the Distribution Plan for such eligible (1000) NRA to 
determine a distribution methodology and, as appropriate, 
notify the plan-level fiduciary of the same.  In addition, 
BFDS shall use best efforts, subject to the requirements of 
¶¶ 8.4.10 and 8.4.11 above, to accomplish distributions to 
all other eligible Accountholders prior to distributing to 
eligible (1000) NRAs. 

8.6.5.3 The eligible NRA shall distribute any monies received pursuant to 
the Distribution Plan in accordance with its fiduciary, contractual, 
and/or legal obligations, and consistent with guidance issued by the 
Department of Labor, if any.   

8.6.5.3.1 Subject to ¶ 8.6.5.3, a service provider (other than the plan 
sponsor, trustee, or other entity authorized to distribute 
monies received pursuant to the Distribution Plan directly 
to Non-IRA retirement plan (“NRP”) participants) may 
allocate the proceeds it receives pursuant to the Distribution 
Plan among the NRPs according to average share or dollar 
balance of the NRPs’ investment in the PBHG Funds 
during the relevant period; and 

8.6.5.3.2 Subject to ¶ 8.6.5.3, the plan sponsor, trustee, or other 
entity authorized to distribute monies received pursuant to 
the Distribution Plan directly to NRP participants: (a) may 
allocate proceeds attributable to a particular NRP to current 
participants pro rata based upon their current total balance 
in the affected NRP, or (b) to the extent permitted by the 
NRP, may use proceeds attributable to a particular NRP to 
pay reasonable expenses of administering the NRP.   

8.6.5.4 In view of, among other things, alternative distribution 
methodologies available to eligible NRAs,11 including those set 
forth above, eligible NRAs will not be reimbursed the costs and 
expenses associated with the administration of the Distribution 
Plan.  

                                                 
 
11  See Department of Labor Field Assistance Bulletin No. 2006-01 (April 19, 2006).   

 22 
 



8.7 Subject to ¶ 8.6.5.3, and in accordance with the Orders, the Respondents will bear 
the costs and expenses associated with the administration of the Distribution Plan, 
including the reasonable administrative costs incurred by Omnibus Holder 
Brokerage Firms and Broker Dealer Firms for identifying individual accountholder 
records in connection with the Distribution Plan.   Requests for reimbursement 
from Omnibus Holder Brokerage Firms or Broker Dealer Firms will be paid to the 
extent that such costs are commercially reasonable in light of the amount to be 
distributed to such firms.  All reimbursement requests are subject to final review by 
Dr. Lehn and the Fund Administrator.      

8.8 Data Accuracy.  All brokerage firms providing information to BFDS will be 
required to attest to Dr. Lehn that to the best of their knowledge the information 
they provide is true and accurate. 

8.9 Affected Accountholders.  Even though the Distribution Plan does not anticipate 
soliciting accountholder information directly from affected investors, it can be 
expected that a limited number of accountholders will contact Dr. Lehn, or others, 
to request a distribution.  If this occurs, the information received will be compared 
to the data obtained by Dr. Lehn during the course of the engagement to 1) ensure 
accurate account information and 2) avoid any duplication of payment.  This 
information will be forwarded to BFDS for processing.   

8.10 Notice and Accountholder Communications.  The Distribution Plan will utilize the 
following methods to provide notifications and information to affected 
accountholders.  These services will become active at least by the time of the first 
distribution.  The Commission retains the right to review and approve any material 
posted on the various websites. 

8.10.1 PBA Website.  PBA will maintain a PBHG Fund website that will 
provide all affected accountholders of the PBHG Funds with regular 
and ongoing updates about the Distribution Plan, including notice of 
the proposed plan, instructions on how to obtain copies of the 
proposed plan, and how to submit comments on the proposed plan to 
the Commission.  The website will provide a link to the Commission’s 
website, which is: 
http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm. 

8.10.2 Notice of a Proposed Plan and Opportunity for Comment by Non-
parties.  Pursuant to the Commission’s Rule of Practice 1103, 17 
C.F.R. §201.1103, notice of the proposed Distribution Plan shall be 
published in the SEC Docket and on the websites listed below.  The 
notice shall specify how copies of the proposed plan may be obtained 
and shall state that persons desiring to comment on the proposed plan 
may submit their views, in writing, to the Commission.  Comments 
received will be publicly available.  Persons should submit only 
information that they wish to make publicly available.  As set forth in 

 23 
 



the Commission’s Rule of Practice 1106, 17 C.F.R. §1106, other than 
in connection with this comment period, no person shall be granted 
leave to intervene or to participate or otherwise to appear in any 
agency proceeding or otherwise to challenge the Distribution Plan, or 
an order approving, approving with modifications, or disapproving the 
Distribution Plan; or any determination relating to the Distribution 
Plan based solely upon that person's eligibility or potential eligibility 
to participate in a fund or based upon any private right of action such 
person may have against any person who is also a respondent in the 
proceeding. 

• http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm 
• http://www.pbhgfunds.com/inside/lrc.asp 

8.10.3 Final Approved Plan.  The Final Approved Plan will be posted on the 
following free public web sites:  

• http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm 
• http://www.pbhgfunds.com/inside/lrc.asp 
• http://www.pbafairfundsettlements.com/ 

8.10.4 Frequently Asked Questions.  In addition to the Final Approved Plan, 
a list of “Frequently Asked Questions” (“FAQS”) will be posted on the 
following websites:  

• http://www.pbhgfunds.com/inside/lrc.asp 
• http://www.pbafairfundsettlements.com/ 

8.10.5 Accountholder Call Center.  PBA has contracted with BFDS to operate 
a toll-free accountholder call center.  Accountholders will have the 
option of speaking to an individual, who will be properly trained by 
BFDS using pre- approved scripts to respond to accountholder 
inquiries.  Separate toll free numbers will be created for direct and 
omnibus accountholders.  These numbers will be published in the 
Letter that accompanies the distribution checks. 

8.11 Initial Distribution.  Upon the Commission’s approval, and subject to ¶8.12.4, 
below, Dr. Lehn will direct BFDS to implement the Distribution Plan.  The 
Commission retains jurisdiction over the implementation of the Distribution Plan.  

8.11.1 All payments shall be preceded or accompanied by a communication 
(the “Letter”) that includes, as appropriate: (a) a statement describing 
the distribution; (b) a description of the tax information reporting and 
other related tax matters; (c) a statement that checks will be void after 

 24 
 

http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm
http://www.pbhgfunds.com/inside/lrc.asp
http://www.sec.gov/divisions/enforce/claims/pilgrimbaxter.htm
http://www.pbhgfunds.com/inside/lrc.asp
http://www.pbafairfundsettlements.com/
http://www.pbhgfunds.com/inside/lrc.asp
http://www.pbafairfundsettlements.com/


90 days; and (d) the name of a person to contact, to be used in the 
event of any questions regarding the distribution.  Where applicable, 
the Letter also will direct Intermediaries of Embedded Omnibus 
Accounts to distribute any monies received pursuant to the 
Distribution Plan in accordance with their fiduciary, contractual, 
and/or legal obligations, and consistent with guidance issued by the 
Department of Labor, if any.   The Letter or other communication to 
eligible accountholders describing their distributions shall be 
submitted to the assigned Commission staff for review and approval.  
Distribution checks, on their face or in the accompanying mailing, will 
clearly indicate that the money is being distributed from a Commission 
Fair Fund. 

8.11.2 All accountholders whose distribution is less than the taxable threshold 
that includes a taxable component will receive the Letter and their 
distribution checks. 

8.11.3 All accountholders whose distribution exceeds the taxable threshold 
and includes a taxable component will receive the Letter, Form 1099 
(or similar document), and their distribution check.   

8.11.4 It is expected that all distribution checks will be mailed, via the United 
States Postal Service (“USPS”), to the eligible accountholders’ last 
know address of record.  All checks drawn on the Account will bear 
the legend “Void after 90 days.”  A wire transfer may be made in lieu 
of a check payment where efficiencies dictate.  Unless specific 
direction is provided by Dr. Lehn or the Commission staff, checks that 
are not negotiated within the 90-day period will not be honored and 
BFDS will instruct the Bank to refuse payment on those checks.  

8.11.5 BFDS has agreed to provide regular updates and reconciliations to Dr. 
Lehn, and will provide a final reconciliation of all un-distributed funds 
to Dr. Lehn.    

8.12 Tax Issues.  The methods of calculation of each accountholders’ share of the Final 
Fair Fund are intended to result in a payment to each eligible accountholder that 
restores the impaired value of the accountholder’s investment in affected PBHG 
Funds. 

8.12.1 Tax Administrator.  The Commission has appointed Damasco & 
Associates (“Damasco”) as the Tax Administrator of the Final Fair 

 25 
 



Fund (“Tax Administrator”).12  Dr. Lehn, BFDS, and the Respondents 
will cooperate with the Tax Administrator in providing information 
necessary to accomplish the income tax compliance, ruling and advice 
work assigned to the Tax Administrator by the Commission.  The Tax 
Administrator shall be compensated by the Respondents in accordance 
with the Orders.    

8.12.2 FairFund2 Tax Obligation.  Upon the combination of Fair Fund2 with 
Fair Fund1, described above in ¶2.5., the Tax Administrator will 
prepare a final tax return for Fair Fund2.   

8.12.3 Other Tax Obligations. Dr. Lehn will consult with the Tax 
Administrator regarding the Final Fair Fund’s income tax compliance, 
reporting and withholding obligations, if any.  Dr. Lehn shall work 
with the Tax Administrator to make adequate reserves for tax liability 
and any costs of tax compliance not required to be paid by the 
Respondents.  

8.12.4 IRS Ruling and Estimated Distribution Duration.  No money shall be 
distributed pursuant to the Distribution Plan prior to the receipt of the 
Ruling by the IRS in connection with the Private Letter Ruling 
currently being sought by the Tax Administrator (the "IRS Ruling").  

8.12.4.1 In the event that IRS Ruling does not require reporting of any 
distributions made pursuant to the Distribution Plan; and provided 
that the Commission has approved the Distribution Plan, the period 
for omnibus outreach has expired in accordance with ¶8.6.2.7 and 
¶8.6.3.7 above, and that the Fund Administrator has completed its 
final calculation of the amount to be distributed to each eligible 
accountholder and associated validations, the Fund Administrator 
will use its best efforts to: (i) start the distribution within two 
weeks of the date of its receipt of the IRS Ruling, and (ii) 
complete the distribution within four months of the transfer of the 
final payment population to the Escrow Account in accordance 
with ¶8.4.10.   

8.12.4.2 In the event the IRS Ruling requires reporting of all or a portion of 
the distributions made pursuant to the Distribution Plan; and 
provided that the Commission has approved the Distribution Plan, 

                                                 
 
12  See Investment Advisers Act of 1940, Release No. 2458 (12/7/2005) and Investment Company Act of 

1940 Release No. 27181 (12/7/2005) (Fair Fund1); Securities Exchange Act of 1934 Release No. 51341 
(3/9/2005) (Fair Fund2).   

 26 
 



the period for omnibus outreach has expired in accordance with 
¶8.6.2.7 and ¶8.6.3.7 above, and the Fund Administrator has 
completed its final calculation of the amount to be distributed to 
each eligible accountholder and associated validations, the Fund 
Administrator will use its best efforts to: (i) start the distribution 
within two weeks of the deadline for returning any back-up 
withholding or other tax forms from eligible investors required by 
the IRS Ruling, and  (ii) complete the distribution within four 
months of the transfer of the final payment population to the 
Escrow Account in accordance with ¶8.4.10.   

8.13 Claims Process.  The Final Fair Fund is not being distributed according to a claims-
made process, so the procedures for providing notice and for making and approving 
claims are not applicable.   

8.14 Locating Accountholders.  Returned and/or undelivered mail and checks will be 
handled as follows: 

8.14.1 All mail returned by the USPS for which a new forwarding address has 
been provided by the USPS will be immediately repackaged and sent 
to the new address.  The master database will be updated with the new 
address. 

8.14.2 All mail returned by the USPS for the first time, without a new 
forwarding address, will be coded as returned mail, the check will be 
voided, and current account information forwarded to InfoAge for 
address research.  If a new address is found, that address will be 
updated to the master database and a new check will be issued. If no 
new address is found, the original check will remain voided. 
Additional efforts to identify the addresses of eligible accountholders 
will be conducted as is commercially reasonable in the view of Dr. 
Lehn, where the costs of further research and the amount to be 
distributed will be considered. 

8.14.3 All mail returned by the USPS from a second attempted mailing, for 
which a new forwarding address has been provided by the USPS, will 
be immediately repackaged and sent to the new address. The master 
database will be updated with the new address. 

8.14.4 All mail returned by the USPS from a second attempted mailing, 
without a new forwarding address, will be coded as returned mail and 
the check will be voided.  Additional efforts to identify the addresses 
of eligible accountholders will be conducted as is commercially 
reasonable in the view of Dr. Lehn, where the costs of further research 
and the amount to be distributed will be considered. 

 27 
 



8.14.5 All uncashed checks returned as undeliverable will be coded as 
“Returned Post Office” (RPO).  These RPO checks will be marked 
“VOID” directly on the check, coded into the settlement database, and 
stored in a secure facility. 

8.15 Special Circumstances.  It is anticipated that distribution checks will be returned to 
BFDS for various reasons, including the death, divorce, incapacitation, bankruptcy, 
or dissolution of the affected eligible accountholder.  BFDS and/or Dr. Lehn will 
resolve and process these distributions on a case-by-case basis.   

8.16 Receipt of Additional Funds.  Fair Fund1 and Fair Fund2 have been deposited at 
Treasury for investment in government obligations and they will receive additional 
funds in the form of interest from these investments and the investments by the 
Bank described above, ¶¶ 8.3.2.1 and 8.3.2.3.  In addition, from time to time, 
persons whom, or entities which, are alleged by the Commission in a separate 
proceeding to have participated in market timing of the PBHG Funds ("Additional 
Funds Proceeding") may enter into settlements with the Commission resulting in an 
order from a court or the Commission; or may be otherwise subject to order(s) of 
the Commission, a court, or other authority; directing them to make payments to 
Fair Fund1 or the Final Fair Fund (“Additional Funds Order”).  Any such payments 
will be deemed, without further analysis by Dr. Lehn, to be intended to compensate 
accountholders in the PBHG Funds for losses suffered in connection with market 
timing in the PBHG Funds for the period spanning June 1998 through December 
2001 ("Additional Funds”).  Dr. Lehn shall distribute the Additional Funds to 
eligible accountholders in accordance with the Distribution Plan, including the 
limitations on distributions of any de minimis amount described in ¶7.8; provided, 
however that: 

8.16.1 Fair Fund1 or the Final Fair Fund receive the Additional Funds prior to 
the final calculation of the amount to be distributed to each eligible 
accountholder ("Distributable Share of Record Owners"); and 

8.16.2  The Additional Funds Order provides that all expenses related to the 
distribution of the Additional Funds shall: 

8.16.2.1  Be borne by the party or parties subject to such Additional Order, 
and such distribution expenses are paid to BFDS as Fund 
Administrator by the party or parties so ordered in advance of the 
final calculation of the Distributable Share of Record Owners; or  

8.16.2.2  Be paid out of the Additional Funds.   

In the event that the Distributable Share of Record Owners has already been calculated 
when the Additional Funds are received or prior to payment in accordance with ¶8.16.2.1, 

 28 
 



above, Dr. Lehn shall cause the Additional Funds to be distributed to the PBHG Funds in 
accordance with ¶ 7.9, and all costs of such distribution will be borne by PBA.  Any 
distribution of any Additional Funds under the Distribution Plan shall be subject to the 
provisions of the Distribution Plan. 

8.17 Termination of the Final Fair Fund.  Within 20 days after the final distribution of 
uncashed or unclaimed funds, Dr. Lehn will submit to the staff of the Commission 
a letter from a registered public accounting firm with a reconciliation of the Final 
Distribution Amount (the “Final Accounting”).  The Final Fair Fund (and the 
Account) shall terminate effective immediately after the Final Accounting is 
approved by the Commission or its delegate.  Within 10 days of the termination of 
the Final Fair Fund, Dr. Lehn will provide to the staff of the Commission an 
attestation that the Distribution Plan, as approved, has been implemented. 

8.18 Extensions of Deadlines.  For good cause shown, the Commission staff may extend 
any of the dates and/or time limits set forth in the Distribution Plan. 

8.19 Material Changes in Plan.  Dr. Lehn will inform the Commission of any material 
changes in the Distribution Plan, and will obtain approval from the Commission 
prior to their implementation.  If material changes are required, the Distribution 
Plan may be amended upon motion of the IDC, the Fund Administrator, or upon 
the Commission’s own motion. 

 

 
Submitted on:  October 6, 2006  By:    ________________________ 

Kenneth Lehn, Ph.D.  
Independent Distribution Consultant 
retained in connection with Pilgrim 
Baxter & Associates, Admin. Proc. 
No. 3-11524 (June 21, 2004).

 29 
 



 
Table 1  

     

Accounts with more than 4 exchanges into Cash Reserve Fund by fund 
(percent of total is in parentheses)  

     
Fund Name                                           Number of Accounts     Volume   ( Millions of dollars)
     
Core Growth 66 (1%) 293 (0%) 
Emerging Growth 658 (11%) 12,760 (10%) 
Focus 63 (1%) 4 (0%) 
Global Technology 37 (1%) 1 (0%) 
Growth 927 (15%) 74,834 (59%) 
International 57 (1%) 19 (0%) 
Large Cap 80 (1%) 133 (0%) 
Large Cap 20 443 (7%) 1,239 (1%) 
Large Cap Growth 155 (3%) 1,855 (1%) 
Limited 27 (0%) 40 (0%) 
Mid-Cap 93 (2%) 65 (0%) 
New Opportunities 281 (5%) 60 (0%) 
Select Growth 903 (15%) 8,015 (6%) 
Small-Cap 95 (2%) 434 (0%) 
Strategic Small 51 (1%) 73 (0%) 
Technology & Comm. 2,063 (34%) 26,645 (21%) 
     
Total 5,999 (100%) 126,470 (100%) 

 

 30 
 



 
Table 2  

       
Accounts with more than 4 exchanges into Cash Reserve Fund by quarter

(percent of total is in parentheses)  
       

Year Quarter  Number of Accounts Volume (Millions of Dollars) 
       

1998 Q2  150 (3%) 319 (0%) 
1998 Q3  145 (2%) 952 (1%) 
1998 Q4  131 (2%) 1,247 (1%) 
1999 Q1  162 (3%) 2,177 (2%) 
1999 Q2  185 (3%) 2,701 (2%) 
1999 Q3  210 (4%) 4,209 (3%) 
1999 Q4  211 (4%) 3,980 (3%) 
2000 Q1  542 (9%) 9,381 (7%) 
2000 Q2  663 (11%) 15,560 (12%) 
2000 Q3  654 (11%) 16,953 (13%) 
2000 Q4  615 (10%) 14,177 (11%) 
2001 Q1  641 (11%) 13,298 (11%) 
2001 Q2  712 (12%) 17,027 (13%) 
2001 Q3  671 (11%) 13,833 (11%) 
2001 Q4  307 (5%) 10,655 (8%) 

       
Total    5,999 (100%) 126,470 (100%) 

 

 31 
 



 

 

32 

ays 1 2 3 4 5 6 7 8 9 10

Table 3 
Regression of Net Equity Purchases on Frequent Traders' Cumulative Cashflow and Other Cashflow 

           
Panel A: Emerging Growth Fund 

           
Period: 1998 - 1999 

           
Number of D   
           
Frequent Traders' Flow Beta -0.043 -0.036 0.013 0.008 0.008 0.009 0.006 -0.005 0.010 0.013
t-statistic -1.70 -1.53 0.54 0.35 0.35 0.37 0.26 -0.20 0.43 0.60
           
           
Other Flow Beta -0.154 -0.005 0.030 0.073 0.082 0.047 0.043 0.060 0.072 0.061
t-statistic -1.84 -0.07 0.49 1.33 1.62 1.02 1.02 1.50 1.92 1.71
           
           

Period:  2000 - 2001 
           
Number of D  ays 1 2 3 4 5 6 7 8 9 10 
           
Frequent Traders' Flow Beta -0.020 -0.018 -0.005 0.008 0.008 0.003 -0.008 -0.001 -0.006 0.010
t-statistic -1.08 -1.15 -0.33 0.55 0.54 0.23 -0.55 -0.08 -0.45 0.74
           
           

0.085
4.85

 

 

Other Flow Beta 0.065 0.074 0.100 0.098 0.107 0.102 0.083 0.095 0.093
t-statistic 1.30 1.83 2.85 3.17 3.86 4.11 3.63 4.62 4.94

 



 

 

33 

 
Table 3 (cont'd) 

Regression of Net Equity Purchases on Frequent Traders' Cumulative Cashflow and Other Cashflow 
           

Panel B: Growth Fund 
           

Period: 1998 - 1999 
           
Number of Days 1 2 3 4 5 6 7 8 9 10
           
Frequent Traders' Flow Beta -0.041 -0.115 -0.035 -0.066 -0.027 0.005 0.016 0.060 0.069 0.011
t-statistic -0.71 -2.31 -0.67 -1.28 -0.50 0.09 0.30 1.15 1.36 0.22
           
           
Other Flow Beta 0.013 0.033 0.041 0.063 0.071 0.063 0.057 0.053 0.058 0.059
t-statistic 0.19 0.71 1.10 1.93 2.43 2.37 2.34 2.30 2.69 2.87
           
           

Period:  2000 - 2001 
           
Number of Days 1 2 3 4 5 6 7 8 9 10
           
Frequent Traders' Flow Beta -0.036 -0.018 0.005 0.016 0.009 0.005 0.003 0.000 0.001 0.007
t-statistic -3.11 -1.74 0.45 1.59 0.89 0.49 0.26 -0.03 0.14 0.73
           
           

0.138
5.22

 

 

Other Flow Beta 0.375 0.359 0.322 0.258 0.231 0.211 0.188 0.163 0.153
t-statistic 2.76 3.83 4.54 4.57 4.90 5.23 5.29 5.13 5.33

 



 

 

34 

ays 1 2 3 4 5 6 7 8 9 10

 
Table 3 (cont'd) 

Regression of Net Equity Purchases on Frequent Traders' Cumulative Cashflow and Other Cashflow 
           

Panel C: Select Growth Fund 
           

Period: 1998 - 1999 
           
Number of D   
           
Frequent Traders' Flow Beta -0.309 -0.279 0.397 0.220 0.159 -0.045 0.297 0.470 0.078 -0.064
t-statistic -1.32 -1.46 2.25 1.21 0.88 -0.24 1.75 2.77 0.45 -0.36
           
           
Other Flow Beta 1.063 1.001 0.894 0.868 0.709 0.613 0.537 0.472 0.406 0.371
t-statistic 3.30 5.14 6.37 7.88 7.70 7.75 7.73 7.54 7.05 7.03
           
           

Period:  2000 - 2001 
           
Number of D  ays 1 2 3 4 5 6 7 8 9 10 
           
Frequent Traders' Flow Beta -0.125 -0.005 -0.003 -0.056 -0.003 0.006 -0.007 -0.017 -0.011 -0.004
t-statistic -2.68 -0.13 -0.06 -1.41 -0.09 0.16 -0.20 -0.47 -0.31 -0.10
           
           

0.292
10.99

 

 

Other Flow Beta 0.589 0.674 0.639 0.579 0.534 0.459 0.412 0.346 0.310
t-statistic 4.07 6.92 8.76 9.98 11.29 11.20 11.49 10.70 10.62

 



 

 

35 

 
Table 3 (cont'd) 

Regression of Net Equity Purchases on Frequent Traders' Cumulative Cashflow and Other Cashflow 
           

Panel D: Technology & Communications Fund 
           

Period: 1998 - 1999 
           
Number of Days 1 2 3 4 5 6 7 8 9 10
           
Frequent Traders' Flow Beta -0.053 -0.006 0.044 0.042 -0.038 -0.080 0.014 -0.042 -0.016 -0.026
t-statistic -1.38 -0.18 1.24 1.17 -1.05 -2.10 0.37 -1.17 -0.47 -0.67
           
           
Other Flow Beta 0.078 0.111 0.163 0.137 0.135 0.111 0.134 0.123 0.119 0.120
t-statistic 0.43 0.98 1.86 1.86 2.11 2.00 2.70 2.73 2.88 3.15
           
           

Period:  2000 - 2001 
           
Number of Days 1 2 3 4 5 6 7 8 9 10
           
Frequent Traders' Flow Beta -0.026 0.010 0.039 -0.005 0.020 0.031 0.013 -0.021 0.005 -0.025
t-statistic -0.87 0.40 1.51 -0.20 0.81 1.29 0.53 -0.83 0.21 -1.05
           
           

0.718
10.84

 

 

Other Flow Beta 2.145 1.657 1.431 1.296 1.216 1.082 0.951 0.851 0.789
t-statistic 5.52 6.69 7.79 8.87 10.17 10.62 10.59 10.60 10.93

 



 

 

36 

 
Table 4 

Total Excess Short-Term Profits by Frequent Traders 
(The first four roundtrips each calendar year are excluded.) 

                  
  1998 1999 2000 2001  

Total FundName  Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 
                  

165.2

0.0

242.8

-0.1

0.3

0.2

0.0
0.0

0.6

1.7

0.2
18.2

0.0

0.0

50.3

4.7

1.5

 

 

 

                 

Growth   0.5 -0.7 5.8 0.4 5.0 6.8 22.1 38.4 22.0 1.0 -62.4 -21.9 88.9 20.7 38.5

Total  1.8 -0.5 12.3 3.9 14.2 8.6 68.4 78.2 40.9 15.2 -122.2 -50.4 108.3 20.4 43.8

Focus  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

New Opportunity  0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0

Small-Cap  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.1 0.3 0.0

Limited  0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Technology & Comm. 0.6 0.5 2.6 2.0 5.1 -2.0 30.8 18.1 9.6 7.6 -44.5 -20.3 6.9 1.3 0.0

Large Cap  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Strategic Small  0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 -0.1 0.0 0.0 0.0 0.0

International  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Large Cap Growth  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 -0.2 0.0 -1.1 1.9

Core Growth  0.0 0.0 0.4 0.4 0.4 0.3 0.1 0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0
Emerging Growth  0.6 -0.4 3.6 1.0 3.5 3.3 11.1 14.4 2.5 1.0 -1.9 -2.3 10.7 3.0 0.0

Global Technology  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Mid-Cap  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Select Growth  0.0 0.0 0.0 0.0 0.0 0.0 2.6 4.6 7.3 5.4 -12.5 -4.0 1.7 -3.8 3.4

Large Cap 20  0.0 0.1 -0.1 0.0 0.0 0.0 1.4 2.5 -0.1 0.2 -0.8 -1.6 -0.1 -0.1 0.0

 



 

 

37 

 
Table 5 

Total Excess Short-Term Profits by Frequent Traders In Percentage Terms 
(The first four roundtrips each calendar year are excluded.) 

                  
  1998 1999 2000 2001  

Total FundName  Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 
                  

0.0%

0.0%

0.1%
0.0%

20.7%

0.0%

0.0%

0.1%

0.7%

0.0%
68.1%

100.0%

0.6%
0.3%

0.1%
1.9%

7.5%
 

 

 

                 

Emerging Growth  0.3% -0.1% 1.5% 0.4% 1.5% 1.4% 4.6% 5.9% 1.0% 0.4% -0.8% -0.9% 4.4% 1.2% 0.0%
Focus  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Large Cap  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Limited  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Mid-Cap  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Global Technology  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Growth   0.2% -0.3% 2.4% 0.2% 2.1% 2.8% 9.1% 15.8% 9.1% 0.4% -25.7% -9.0% 36.6% 8.5% 15.9%

New Opportunity  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Strategic Small  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total  0.7% -0.2% 5.1% 1.6% 5.8% 3.5% 28.2% 32.2% 16.9% 6.2% -50.3% -20.8% 44.6% 8.4% 18.0%

Core Growth  0.0% 0.0% 0.2% 0.2% 0.2% 0.1% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

International  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Large Cap Growth  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% 0.0% -0.5% 0.8%
Large Cap 20  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.6% 1.0% -0.1% 0.1% -0.3% -0.6% 0.0% 0.0% 0.0%

Small-Cap  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% 0.0% 0.1% 0.0%

Technology & Comm. 0.3% 0.2% 1.1% 0.8% 2.1% -0.8% 12.7% 7.4% 3.9% 3.1% -18.3% -8.4% 2.8% 0.6% 0.0%

Select Growth  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.1% 1.9% 3.0% 2.2% -5.2% -1.7% 0.7% -1.6% 1.4%

 



 

 

38 

 
Table 6 

The Distribution of the Settlement Proceeds Across Funds and Quarters 
(The first four roundtrips each calendar year are excluded.) 

                  
  1998 1999 2000 2001  

Total FundName  Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 
                  

0.0

250.0

170.1

-0.1

0.3

0.0

0.2

0.2

1.8

0.0

0.7

0.0

4.8

18.7

0.0

51.7

1.6

 

 

 

                 

Focus  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total  1.8 -0.5 12.7 4.0 14.6 8.8 70.4 80.6 42.1 15.6 -125.8 -51.9 111.5 21.0 45.1

Growth   0.5 -0.7 5.9 0.4 5.1 7.1 22.8 39.6 22.7 1.1 -64.2 -22.5 91.6 21.3 39.7

New Opportunity  0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 -0.2 0.0 0.0 0.0 0.0 0.0 0.0

Small-Cap  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.1 0.3 0.0
Strategic Small  0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 -0.1 0.0 0.0 0.0 0.0

Core Growth  0.0 0.0 0.4 0.4 0.4 0.3 0.1 0.2 -0.1 0.0 0.0 -0.1 0.0 0.0 0.0

Limited  0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Large Cap  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Mid-Cap  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Technology & Comm. 0.7 0.5 2.6 2.1 5.3 -2.1 31.7 18.6 9.8 7.8 -45.8 -20.9 7.1 1.4 0.0

International  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Large Cap Growth  0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 -0.2 0.0 -1.2 2.0

Emerging Growth  0.7 -0.4 3.7 1.1 3.6 3.4 11.4 14.8 2.6 1.0 -1.9 -2.4 11.1 3.1 0.0

Select Growth  0.0 0.0 0.0 0.0 0.0 0.0 2.7 4.7 7.5 5.5 -12.9 -4.1 1.8 -3.9 3.5

Global Technology 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Large Cap 20  0.0 0.1 -0.1 0.0 0.0 0.0 1.5 2.6 -0.1 0.2 -0.8 -1.6 -0.1 -0.1 0.0