SEC, Massachusetts Accuse Putnam of Fraud
By Svea Herbst-Bayliss, Reuters News
BOSTON (Reuters) - Federal and state regulators on Tuesday accused Putnam Investments of securities fraud, making the mutual fund company the first to be formally charged in a widening probe into improper trading.
In separate civil complaints, the U.S. Securities and Exchange Commission and Massachusetts regulators said that Putnam Investments, the fifth-largest U.S. mutual fund company with $272 billion in assets under management, knew for five years that some of its fund managers were breaking securities laws but looked the other way.
Massachusetts Secretary of the Commonwealth William Galvin, the state's top securities regulator, said Putnam, a unit of insurer Marsh & McLennan Cos. Inc., and former Putnam fund managers Justin Scott and Omid Kamshad committed fraud by skirting written company policies against "market timing."
"This is about personal deceit, breach of duty, breach of trust and corporate deceit," Galvin said at a news conference.
According to Galvin's complaint, Justin Scott, a 15 year Putnam veteran, has been the chief investment officer and managing director of Core Equities while Kamshad, who has been with the company seven years, was chief investment officer for International Core Equities. Regulators charged that both used information that no other investors had to generate profits for themselves.
Regulators said that at least six Putnam employees were allowed to engage in market-timing at some point. They did not release the names of the other employees.
Kamshad was warned by Putnam about his trading activity in 2000, but continued to make the trades into this year, Galvin said.
Galvin is demanding that the managers give back the profits they made through market timing and that Putnam reimburse customers losses market timing may have caused. Most important, Galvin said he wants Putnam to admit that it violated consumer trust and breached its fiduciary duties.
John Gilmore, Kamshad's attorney who is a partner at Piper Rudnick, said, "The trades at issue did not violate any rule, regulation or statute," and said he will fight the charges.
Market timing involves quick-paced buying and selling of mutual fund shares with an eye to profit from stale prices. While it is not illegal, it is prohibited by many companies, including Boston-based Putnam, because it drives up trading costs and waters down returns for long-term investors.
Separately, the SEC filed a civil suit against Scott and Kamshad in federal court in Boston, saying their excessive trading hurt other fund investors at the company.
The U.S. mutual fund industry manages about $7 trillion in assets. For many of the 95 million Americans who invest in the funds, the funds hold all of their retirement savings, often through company pension plans.Other Funds Under Investigation
Galvin, who began probing Putnam only last month, said he is also investigating activities at three other large mutual fund companies and said these charges "should send a message to everyone in the fund industry."
Boston is the hub of the mutual fund industry. Galvin, New York Attorney General Eliot Spitzer and the SEC have been probing improper trading for weeks.
Putnam did not return calls seeking comment. But last week a spokeswoman denied any wrongdoing by the company. Scott's lawyer could not be reached.
In addition to letting fund managers engage in market timing, Galvin said Putnam also turned a blind eye when members of a local union engaged in market timing in their retirement plans. One union member made $1 million in profits. Although Putnam said the activities stopped years ago, Galvin said that they continued into this year.
Massachusetts regulators said they were led to the questionable trades by a Putnam call center employee.
Putnam last week said it would replace four fund managers, and Galvin on Tuesday said he might file additional charges against other Putnam employees.
Already some Putnam investors are getting skittish. A trustee for the $29 billion Massachusetts state pension fund plan, which invests about $1 billion in international equities with Putnam, told Reuters the fund will likely fire Putnam as soon as Thursday when the board holds an emergency meeting.
Research firm Morningstar Inc. is also considering whether to advise private investors to get out of Putnam.
"Clearly the biggest question is why (Putnam) didn't act more forcefully when they found out about this activity," said Morningstar analyst Kunal Kapoor.
Putnam, which built its reputation with high flying growth funds in the 1990s, fell on hard times when the stock market bubble burst. In 2002 and so far this year it ranked as having had the largest customer withdrawals of any fund company, according to data from Financial Research Corp. (Additional reporting by Mark Wilkinson and Tim McLaughlin in Boston, and Kevin Drawbaugh in Washington.)