EX-99.77E LEGAL 3 r77e.htm

Legal Proceedings

On June 1, 2004, the Attorney General of the State of New Jersey announced
that it had dismissed PIMCO from a complaint filed by the New Jersey
Attorney General on February 17, 2004, and that it had entered into a
settlement agreement (the "New Jersey Settlement") with AGI, PEA Capital
LLC (an entity affiliated with PIMCO through common ownership) ("PEA") and
Allianz Global Investors Distributors LLC ("AGID"), in connection with the
same matter. In the New Jersey Settlement, AGI, PEA and AGID neither
admitted nor denied the allegations or conclusions of law, but did agree to
pay New Jersey a civil fine of $15 million and $3 million for investigative
costs and further potential enforcement initiatives against unrelated
parties. They also undertook to implement certain governance changes. The
complaint relating to the New Jersey Settlement alleged, among other
things, that AGI, PEA and AGID had failed to disclose that they improperly
allowed certain hedge funds to engage in "market timing" in certain funds.
The complaint sought injunctive relief, civil monetary penalties,
restitution and disgorgement of profits.

Since February 2004, PIMCO, AGI, PEA, AGID, and certain of their
affiliates, including the PIMCO Funds, the Allianz Funds, and the Trustees
and employees of the PIMCO Funds, have been named as defendants in fifteen
lawsuits filed in various jurisdictions. Eleven of those lawsuits concern
"market timing," and they have been transferred to and consolidated for
pre-trial proceedings in a multi-district litigation proceeding in the
U.S. District Court for the District of Maryland; the other four lawsuits
concern "revenue sharing" and have been consolidated into a single action
in the U.S. District Court for the District of Connecticut. The lawsuits
have been commenced as putative class actions on behalf of investors who
purchased, held or redeemed shares of the various series of the PIMCO Funds
and the Allianz Funds during specified periods, or as derivative actions
on behalf of the PIMCO Funds and Allianz Funds.

The market timing actions in the District of Maryland generally allege
that certain hedge funds were allowed to engage in "market timing" in
certain of the Allianz Funds and the PIMCO Funds and this alleged activity
was not disclosed. Pursuant to tolling agreements entered into with the
derivative and class action plaintiffs, PIMCO, the Trustees, and certain
employees of PIMCO who were previously named as defendants have all been
dropped as defendants in the market timing actions; the plaintiffs continue
to assert claims on behalf of the shareholders of the PIMCO Funds or
on behalf of the PIMCO Funds themselves against other defendants. By order
dated November 3, 2005, the U.S. District Court for the District of
Maryland granted the PIMCO Funds' motion to dismiss claims asserted against
it in a consolidated amended complaint where the PIMCO Funds were named,
in the complaint, as a nominal defendant. The revenue sharing action in the
District of Connecticut generally alleges that fund assets were
inappropriately used to pay brokers to promote the Allianz Funds and PIMCO
Funds, including directing fund brokerage transactions to such brokers,
and that such alleged arrangements were not fully disclosed to
shareholders. On August 11, 2005 the U.S. District Court for the
District of Connecticut conducted a hearing on defendants' motion to
dismiss the consolidated amended complaint in the revenue sharing
action but has not yet ruled on the motion to dismiss. The market timing
and revenue sharing lawsuits seek, among other things, unspecified
compensatory damages plus interest and, in some cases, punitive damages,
the rescission of investment advisory contracts, the return of fees
paid under those contracts and restitution.

Under Section 9(a) of the Investment Company Act of 1940, as amended
("1940 Act"), if the New Jersey Settlement or any of the lawsuits described
above were to result in a court injunction against AGI, PEA, AGID and/or
their affiliates, PIMCO could, in the absence of exemptive relief granted
by the SEC, be barred from serving as an investment adviser to any
registered investment company, including the Fund. In connection with an
inquiry from the SEC concerning the status of the New Jersey Settlement
under Section 9(a), PEA, AGID, AGI and certain of their affiliates
(including PIMCO) (together, the "Applicants") have sought exemptive
relief from the SEC under Section 9(c) of the 1940 Act. The SEC has
granted the Applicants a temporary exemption from the provisions of
Section 9(a) with respect to the New Jersey Settlement until the earlier
of (i) September 13, 2006 and (ii) the date on which the SEC takes final
action on their application for a permanent order. There is no
assurance that the SEC will issue a permanent order.

Two nearly identical class action civil complaints have been filed in
August 2005, in the Northern District of Illinois Eastern Division
alleging that the plaintiffs each purchased and sold a 10-year Treasury
note futures contract and suffered damages from an alleged shortage when
PIMCO held both physical and futures positions in 10-year Treasury notes
for its client accounts. The two actions have been consolidated into one
action, and the two separate complaints have been replaced by a
consolidated complaint. PIMCO is a named defendant, and the PIMCO Funds
have been added as a defendant, to the consolidated action. PIMCO
strongly believes the complaint (and any consolidated complaint filed
hereafter) is without merit and intends to vigorously defend itself.

The Fund was recently served in an adversary proceeding brought by the
Official Committee of Asbestos Claimants of G-I Holdings, Inc. in G-I
Holdings, Inc.'s bankruptcy in the District of New Jersey. PIMCO
was previously named in this lawsuit and remains a defendant. The
plaintiff seeks to recover for the bankruptcy estate assets that were
transferred by the predecessor entity of G-I Holdings, Inc. to a wholly-
owned subsidiary in 1994. The subsidiary has since issued notes, of which
the Fund is alleged to be a holder. The complaint alleges that in 2000,
more than two hundred noteholders–including the Fund–were granted a
second priority lien on the assets of the subsidiary in exchange for
their consent to a refinancing transaction and the granting of a first
priority lien to the lending banks. The plaintiff is seeking invalidation
of the lien in favor of the noteholders and/or the value of the lien.

The foregoing speaks only as of the date of this report. PIMCO believes
that these developments will not have a material adverse effect on the
Fund or on PIMCO's ability to perform its investment advisory
services on behalf of the Fund.