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30 Firms Face NASD Fund-Trading Probe

Putnam Executives Said to Benefit Personally

Oct 29, 2003 | Washington Post

NASD, the securities industry's main regulator, is investigating more than 30 firms in connection with improper mutual fund trading, people familiar with the matter said Tuesday.

The investigations are part of an industry-wide review of mutual fund practices known as market timing and late trading. In the latest action to arise from the examination of the industry, federal and Massachusetts officials brought civil and administrative charges Tuesday against mutual fund giant Putnam Investments, alleging for the first time that fund executives had profited personally from such practices.

Securities industry sources also confirmed a Bloomberg News report that the New York Stock Exchange has begun asking members for information about fund trading.

The focus on industry practices began when Eliot L. Spitzer, the attorney general of New York state, disclosed Sept. 3 that four mutual fund companies had made secret deals allowing a New Jersey hedge fund to make rapid-fire trades that siphoned profits from ordinary investors.

Between them, NASD and the Securities and Exchange Commission have demanded information from nearly 250 mutual fund companies and broker-dealers about after-hours trading, which is illegal, and market timing, a short-term trading strategy that exploits time differences and stale prices, particularly in international funds. Timing is not illegal, but most funds say they discourage it because it can cut into overall returns.

More than half of the 88 mutual fund families surveyed by the SEC acknowledged that they allowed some investors to engage in timing, an official there said. The 30-plus investigations at NASD may only be a first wave, a source said.

In the case against Putnam, a unit of Marsh & McLennan Cos., the Massachusetts secretary of the commonwealth, William Francis Galvin, alleged in court papers that six of the firm's executives, including four portfolio managers, made improper short-term trades, and that the firm failed to stop them.

"Mutual funds are really the investments of Ma and Pa and the kiddie, too," Galvin said. "Having a mutual fund industry you can't trust is unacceptable."

Galvin said a whistle-blower came to his office in September with allegations that Putnam was allowing market timing by members of a union that had its 401(k) plan with Putnam. The Boston Globe reported that the whistle-blower, Peter Scannell, had gone to the SEC in March but that the commission's Boston staff never got back to him. Scannell did not return a phone call seeking comment.

SEC enforcement director Stephen M. Cutler said yesterday that the commission was examining how it handled Scannell's approach. Cutler said he was contacted by a second whistle-blower who alerted him to alleged personal trading by Putnam executives.

Yesterday, the SEC filed civil actions alleging that two former Putnam portfolio managers had committed securities fraud by timing the funds they managed. The SEC also alleged that the firm committed fraud by failing to disclose the trading by insiders. The trading started in 1998 and continued through this year, according to the complaints.

Putnam said in a statement that it had done an independent review and put all the individuals named in the complaints on leave.

"We believe Putnam did not act fraudulently. Putnam did not receive any financial benefit" from the trading," the firm said. "Unfortunately our systems and controls were not perfect. We wish they had been."

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