Tell Bill Gross he can put the shades away because when it rains it pours. This morning much of America woke up to a report that the SEC is looking into whether Pimco fund accounting folks improperly pegged the Total Return ETF's NAV.

The news cannot be what the Bond King and his team wanted to wake up to this morning. The story was first reported by the Wall Street Journal at 10 pm Tuesday night. Since then it has been picked up by more than 100 news outlets, according to Google News. Even worse, the New York Times accompanies its story with a picture of Bill Gross on the golf course.

For Gross, the news is anything but new. He reportedly spent a full day with SEC officials over the matter six months ago and the alleged misconduct occurred three years ago.

The probe apparently originated after a lawsuit brought in March of 2013 by Jason Williams, a former Pimco trader. In the since withdrawn suit, Williams claimed that he was fired after reporting issues with the ETF's NAV calculation to regulators. He shared his concerns with supervisor Chris Dialynas, a managing director and member of PIMCO's investment committee. Williams also reported his allegations to the Treasury Office of the Special Inspector General for the Troubled Asset Relief Program in December of 2011.

According to the WSJ, Pimco accountants calculated values of new holdings at amounts higher than discounted prices that the ETF purchased them for. That meant the ETF's NAV "popped" up when reported even without actual changes in the market prices of the positions.

The paper further reports that SEC investigators are looking into whether investors received accurate information about the fund's performance.

Pimco's spokesperson said that the firm's "pricing procedures are entirely appropriate and in keeping with industry best practices."

Fortunately, the WSJ takes a stab at reporting the specifics of how the ETF pricing could have been misleading.

When the ETF launched, Pimco was offered "odd lots" of bonds or small issues that securities firms found unwieldy to distribute. In exchange for taking large blocks of these bonds, the Pimco ETF received a discount on the price.

However, Pimco's external pricing services then reportedly used the non-discounted price for the purpose of determining the value of the portfolio.

Ironically, the Total Return ETF's strong launch -- it raised $2.4 billion in its first six months -- could be seen as evidence that investors were mislead by the ETFs strong performance against the plan-old mutual fund version of Total Return.

While the allegations and involvement of the SEC may raise concerns among investors and advisors, it is getting a shrug from ETF industry insiders.

"What they’re being accused of is in fact the industry standard accounting process," Dave Nadig, chief investment officer at San Francisco-based ETF.com, told Bloomberg. He pointed out how Pimco was pricing the ETF based on estimates or dealer quotes rather than the price it earlier paid was dictated by law.  

Edited by: Sean Hanna, Editor in Chief


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