NEW YORK — Regulators filed civil fraud charges against the two founders of the Pilgrim Baxter mutual fund family Thursday, saying they made millions for themselves and friends in an improper trading scheme that harmed other fund shareholders.

Gary Pilgrim and Howard Baxter were accused by the Securities and Exchange Commission and New York's attorney general of defrauding investors by allowing selected customers to make in-and-out trades prohibited by fund policy.

The civil charges mark the first time fund company leadership has been directly charged in a trading scandal that has rapidly spread across the $7 trillion fund industry. Previously, regulators had taken action against two former Putnam Investments portfolio managers, as well as the firm, but Putnam's top executives were not directly accused.

Authorities said it appears Pilgrim benefited the most financially from the trades, while Baxter broke the law by allowing them. One trading arrangement netted more than $13 million in profits, including $3.9 million for Gary Pilgrim, according to the SEC complaint.

The agencies said they will seek restitution for investors as well as financial penalties. The New York state complaint also seeks the return of all management fees earned by Pilgrim Baxter during the alleged wrongdoing — which it estimates at $250 million.

"There will be enormous fines," New York State Attorney General Eliot Spitzer told The Associated Press. "This was such a gross violation of their fiduciary duties."

The move comes a week after both Pilgrim and Baxter were ousted from Pilgrim Baxter & Associates, which manages the PBHG fund family, because of improper trading.

In a statement Thursday, Pilgrim Baxter & Associates stressed that both men have left the company and that it is cooperating with the investigation, although it does not agree with everything in the complaints. Last week, the company said Gary Pilgrim would turn over personal profits he received from the improper trading and the company would reimburse the fund all related management fees.

The charges are the latest wrinkle in a widespread investigation by the SEC, the states of Massachusetts and New York and other regulators.

Putnam and Canary Capital, a hedge fund operator, have agreed to settlements for fund-related wrongdoing.

Authorities have also accused some individuals at Fred Alger & Co., Bank of America and Millennium Partners of improper trading. They also have indicated charges are likely against Alliance Capital for improper trading.

According to Thursday's filings, Gary Pilgrim, his wife, hedge fund manager Michael Christiani and a fourth unidentified individual established the Appalachian Trails hedge fund, which was permitted to conduct extensive in-and-out trading of PBHGs funds in 2000 and 2001, about the time the bull market soured.

The practice, known as market timing, is not illegal, but had been formally prohibited by the fund family because it skims profits from longer-term shareholders.

The charges also allege that clients of Wall Street Discount, a brokerage run by Alan Lederfeind, a close friend of Baxter, were provided with nonpublic information about the portfolio holdings of PBHG funds — a process which facilitated the market timing and generated significant profits for these customers.

Neither Christiani nor Lederfeind have been charged, though Spitzer said more charges are possible.

The arrangements that were engineered or permitted by Gary Pilgrim and Baxter came at a time when the funds' own portfolio managers were complaining that market timing was having a negative effect on returns for typical shareholders and other market timers were ordered to stop.

The complaint cites an e-mail in which Gary Pilgrim suggested giving market timers "the boot" because they hurt shareholders and probably are "not even in our business interests."