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Monday, June 26, 2006

PIMCO Trial: Corba Cross-Examined

Reported by Marie Glancy

Five years is a long time to remember specific conversations, former PEA Capital CEO Ken Corba has suggested during his testimony in the trial of former PIMCO Advisors Distributors CEO Steve Treadway. So, during cross-examination, Treadway's attorney, Alan Levine, helped Corba refresh his memory by repeatedly referring him to statements he made during an investigative testimony in February 2004.

For example, in that 2004 testimony, Corba described his first discussion with Treadway about the new relationship PIMCO Equity Advisors (later PEA Capital) had established with financier Edward Stern and his company, Canary Capital Partners. Corba recalled conceding to Treadway, “I know you discourage market timing.”

In court Friday, however, Corba – asked whether he knew Treadway was cynical about market timing -- first told Levine that he and Treadway “never discussed” the pros and cons of the practice. Upon having the 2004 testimony repeated, however, he agreed he had known that Treadway discouraged it.

Appearing generally grim and uncomfortable, Corba frequently hesitated in his answers. Over the course of the cross-examination, which lasted roughly three hours, he agreed that Treadway was “consistently skeptical” about the Canary arrangement throughout 2002; confirmed that he, Corba, did not report to Treadway; admitted that he, Corba, has no clear memory of what was said on either side during the conversation in which he first mentioned the Canary arrangement to Treadway, and said that in June 2002 Treadway, on the verge of closing down the Stern trading, delayed that decision only after Corba's reassurances that investors in PIMCO funds were not being harmed by Stern's activities.

Corba maintains he did not know what Stern's market timing model would look like until Stern commenced frequent trading in early 2002. Levine sought to highlight that Corba could not have revealed to Treadway what he claims he did not realize himself.

At the same time, Levine's questioning exposed confusing elements of Corba's testimony. Though it appears an upper limit of four “round-trip” trades a month had been negotiated with Stern and his brokers by, at the least, representatives of PEA Capital answerable to Corba, Corba at one point said he had not given permission for that rate of trading, and at another that he never expected such an extreme rate would be reached. Asked whether he meant to give the jury the impression, during questioning by the prosecution Thursday, that he initially told Treadway about the parameter of four round trips a month, Corba said he did not.

More than once, Corba responded to questions about specific conversations saying that his memory may have combined two meetings into one. He said he was unsure whether he was present only for a brief, introductory meeting with the brokers, Ryan Goldberg and Michael Grady, or whether he also attended a second meeting, in which the specifics of a trading deal were discussed.

In response, Levine showed Corba and the jury a letter from Goldberg to Corba, dated November 2, 2001, in which Goldberg thanked Corba for meeting with Goldberg and Grady and detailed the terms of an arrangement that included market timing. Corba told Levine he never received the letter, despite the existence of a delivery receipt from Federal Express, also shown to the jury.

“It is my testimony that I never had possession of that letter ... nobody calls me Kenneth,” he added, referring to the salutation used. Corba's surname was also misspelled in the address.

Later Levine asked Corba whether he had ever gone to Treadway with the letter or the information contained therein. “The proposals were made to me verbally and I don't recall a conversation with Steve going through these specifics,” he replied.

Corba also agreed, after reviewing his own February 2004 testimony, that he understood Treadway missed a March 2002 lunch with Stern at New York's Racquet Club because he did not want to meet Stern. “It wouldn't be normal” for an institutional client of PEA to meet with a PIMCO executive, he conceded.

Finally, Levine questioned Corba about Treadway's decision to halt trading by Canary. Treadway and Corba had “very little discussion” at the time, Corba said. He said he told PEA's institutional liaison, John Cashwell, to convey the message to Goldberg and Grady, and understood that all PEA Capital managing directors knew of Treadway's decision.

However, trading continued on the Opportunity Fund following Treadway's official prohibition. Corba said he was not aware of this at the time. Levine has tried to show that the Opportunity Fund deal was negotiated between Stern, Cashwell, and the fund's manager, Michael Gaffney, behind Treadway's back in autumn of 2002. Corba offered no statements to contradict this, at the close of a cross-examination that occasioned no high-fives among the SEC's lawyers.  

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