The jury in the civil fraud trial of former PIMCO Advisors Distributors chief executive Stephen Treadway was sent into deliberations Wednesday afternoon, charged with determining whether he acted "negligently" or "recklessly" in relation to PEA Capital's relationship with hedge fund Canary Capital Partners and its managing principal, Edward Stern.

In closing arguments Wednesday morning at the U.S. District Court in Manhattan, Securities and Exchange Commission lawyer Kathryn Pyszka insisted Treadway was party to a "special and secret market timing arrangement" in 2002, and his actions with regard to investments in PIMCO funds by Canary Capital Partners were contrary to the policies laid out in his company's prospectus. But defense attorney Alan Levine claimed Treadway did "exactly the opposite of someone who would violate the prospectus" and said the SEC failed to prove its case.

Upwards of forty people crowded the seats of the courtroom to hear first Levine and then Pyszka deliver their final remarks. Levine, who requested and was denied "two to three hours" for his presentation, was reminded by the judge to wrap it up after an hour and forty minutes.

"Ask yourself, what is the evidence against Steve Treadway?" Levine urged the jury. He reiterated that Treadway knew only that the Stern deal "might run afoul" of the company's policy on market timing, and pointed out that Treadway was not "caught in the act" of any wrongdoing, but put a stop to the Canary trading himself.

"Steve Treadway throws Stern out. Corba doesn't throw Stern out; the SEC doesn't come in in 2002 and throw Stern out," he said. "We are here, ladies and gentlemen, because Steve Treadway didn't throw Stern out soon enough."

Levine also accused the SEC of manipulating evidence to confuse the jury. He questioned why the Commission did not call certain witnesses, and pointed to a line in the prospectus stating that PAD "reserves the right" to refuse purchases if such purchases "would adversely affect a fund and its shareholders." Levine suggested that here, the SEC glossed over a differentiation between the language of the prospectus and the firm's usual operational procedure. And SEC's own expert witness, he said, had agreed that risk to investors in the case of the Stern market timing was not certain, but rather "a judgment call."

Treadway had no reason to suspect that Corba was misleading him, Levine said, and therefore Treadway was not negligent because he acted as a reasonable person would.

At least six of the eight jurors had out notepads during the closing statements, but it was difficult to keep up with the fast and technical speech of Pyszka. She outlined for the jury definitions of "fiduciary duty," "ordinary care," and "preponderance of the evidence," reminding them that they are obliged to side with the SEC if they find they find the scales tip even slightly in its favor.

Pyszka said Treadway knew enough, from the time he was first told about the Stern relationship, to know it went against the policies laid out in his company's prospectus. "Without his approval, the relationship could not proceed. He gave Canary the green light to go forward," she said.

She also charged that, by giving Canary until the end of October 2002 to liquidate their holdings in Pimco Funds, Treadway allowed the hedge fund to recoup some of its losses, at the expense of long-term shareholders.

A person may be deemed reckless within the law "even if he thought himself to be careful," she added, if his behavior shows an egregious disregard of the obvious.

Rebutting Levine's charge that the SEC deliberately avoided calling certain witnesses, Pyszka said calling all potential witnesses would have taken too long, and countered that the defense would have called other individuals if those persons agreed with Treadway.  

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