Putnam's Chief Steps Down Amid Shake-Up in Fund Industry
By Kenneth N. Gilpin, The New York Times
The reverberating scandal rocking the mutual fund industry claimed another victim today, when the Marsh & McLennan Companies, parent of Putnam Investments, said Lawrence J. Lasser had been removed as Putnam's president, chief executive and a director, effective immediately.
Mr. Lasser, 60, was forced out after federal and civil fraud charges were filed against Putnam and a wave of big pension funds said they would pull money from Putnam funds.
Since the accusations against Putnam emerged on Oct. 28, state pension funds in Massachusetts and Iowa have withdrawn more than $4 billion from the firm, the nation's fifth-largest mutual fund company.
Mr. Lasser, who was Putnam's president and chief executive since 1986 and a director since 1987, is the second mutual fund executive swept up in the scandal in recent days.
The founder of Strong Mutual Funds, Richard S. Strong, resigned as chairman on Sunday, a few days after the New York State attorney general, Eliot Spitzer, said he would take action against Mr. Strong for the improper trading of shares. But Mr. Strong kept his job as chief executive, meaning he is still running the company.
Mr. Strong has not not commented on accusations that he made as much as $600,000 in profits from his trades. The announcement of his departure from the board was made by the independent directors of the Strong Mutual Funds.
In an appearance today before the Senate Subcommittee on Financial Management, which is holding hearings on fund abuses, Mr. Spitzer said in prepared remarks that too many funds "have abandoned the interests of shareholders and instead permitted and indeed fostered an environment that promotes the interests of their managers at the expense of their shareholders."
At the hearings, the chief of enforcement for the Securities and Exchange Commission, Stephen Cutler, presented the results of a study that showed that illegal trading in mutual funds was more widespread than previously thought.
In a sample of the nation's 88 largest mutual fund companies, which collectively hold about 90 percent of the industry's assets, the S.E.C. said that about 25 percent of the broker-dealers allowed, or were allowed to make, illegal late trades.
In addition, the survey showed that half the funds let certain shareholders engage in short-term "market timing" trades that are supposedly banned by the funds and are not available to retail investors.
Finally, the survey showed that more than 30 percent of the funds admitted that their managers had given sensitive portfolio information to favored shareholders.
Mr. Spitzer, whose investigation into the mutual fund business began in early September after a complaint against the hedge fund Canary Capital Partners is also to testify on Capitol Hill today. He and a number of other current and former fund officials, including John W. Bogle, the founder of Vanguard Investments, are expected to offer prescriptions about how to reform the business.
Although more than 30 people at an array of investment companies have been suspended or fired during Mr. Spitzer's investigation, Mr. Lesser, who was paid $163 million by Putnam over the last six years, is the highest-ranking executive to lose his job, although he has not been directly implicated in the scandal at Putnam.
Charles Haldeman, 55, co-head of investments at Putnam, was chosen to succeed Mr. Lesser while retaining his investment responsibilities, Marsh & McClennan said in a statement.
In addition, Marsh & McClennan announced the creation of two new posts at Putnam — chairman and vice chairman. A.J.C. Smith, 69, a former chairman and chief executive of Marsh & McClennan, will become Putnam's chairman, and Steven Spiegel, 58, a senior managing director at the firm, will be vice chairman.
Marsh & McClennan also said it had hired Barry P. Barbash, a former director of the division of Investment Management at the Securities and Exchange Commission, who is now a partner at Shearman & Sterling, to conduct an independent review of Putnam's policies and controls.
Mr. Barbash will report directly to Marsh & McClennan's chairman and chief executive, Jeffrey W. Greenberg.
"The kind of conduct that occurred has no place at Putnam," Mr. Greenberg said in a statement. "We are taking measures to see that this does not happen again. We deeply regret that such conduct occurred and apologize to Putnam shareholders."
Marsh & McClennan has previously said it will make complete restitution to Putnam funds for any losses suffered by Putnam shareholders as a result of improper trading activities.
Mr. Haldeman, who has nearly 30 years' experience in investment management, came to Putnam a little over a year ago from the Lincoln National Investment Companies, where he was president and chief executive of its Delaware Investments subsidiary.
Under Mr. Lasser, who spent 34 years at Putnam, assets under management at the firm rose to $422 billion in March 2000, the peak of the technology-led stock market boom. When he took over the top posts at the firm in 1986, Putnam had $20 billion in assets under management.
At the end of September, Putnam was managing $272 billion in assets. Geoff Bobroff, who runs his own mutual fund consulting company, said that "until recently, his stewardship of Putnam was phenomenal.
"Over the last 12 to 18 months, Putnam has seen significant redemptions, but that has been because of performance," he said. "In many ways, Putnam has been the envy of people in the industry."
One of the oldest names in the mutual fund business, Putnam was founded in 1937 by a descendant of the Massachusetts Supreme Court justice Samuel Putnam.
In 1830, Justice Putnam ruled that funds in trust should be managed from the perspective of a "prudent man." That principal helped create the basis for the mutual fund industry, which manages more than $7 trillion in assets for some 100 million Americans.
Mr. Bobroff, the mutual fund consultant, said it would be some time before the complete stain of bad practices at fund companies was exposed.
"We are not anywhere close to the end of this scandal," he said. "I would say we are in the third inning of a nine-inning game."
In an article posted today on its Web site, Morningstar Inc. said it was recommending that investors hold off on sending new money to Putnam "for now."
"We had planned to issue a `consider sell' recommendation on Putnam had Mr. Lasser remained at the company," Russell Kinnel, director of funds resarch at Morningstar, said in the commentary. "What happened at Putnam was absolutely appalling, and it happened under Lasser's watch."