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Massachusetts Weighing Case Against Putnam

Oct 21, 2003 | Massachusetts regulators are considering filing securities fraud charges against Putnam Investments, as the mutual fund trading scandal continues to expand.

A spokesman for Massachusetts Secretary of the Commonwealth William Galvin said Tuesday that securities regulators will soon decide whether to charge Putnam with engaging in improper trading activity in some of its mutual funds. The Boston Globe first reported that Galvin's office was close to filing charges against Marsh & McLennan.

The investigation by Galvin's office is similar to an inquiry by New York Attorney General Eliot Spitzer that has rocked the $6.9 trillion mutual fund industry. But unlike Spitzer, who already has secured two criminal convictions, any charges filed by Galvin against Putnam would only be civil in nature.

The allegations at Putnam concern issues of market-timing, an arbitrage strategy that allows savvy traders to take advantage of the time differences between the closing of the U.S. markets and foreign exchanges. While market-timing is largely legal, it can become an issue if a mutual fund company that vows to prohibit the practice ends up violating its own rules.

There's no indication that Galvin's office investigation includes allegations of late-trading, a more serious abuse that has become the focus of Spitzer's investigation into mutual fund abuses. Late-trading is an illegal activity in which favored customers are allowed to buy mutual funds that were priced prior to the release of market-moving news.

Both late-trading and market-timing give an unfair advantage to a select group of investors and can dilute the value of a fund's shares.

The news that Massachusetts regulators are closing in on Putnam drove shares of Marsh & McLennan, the big insurance concern that owns Putnam. The stock, in afternoon trading, was down $1.45, or 3%, to $46.93.

Putnam, meanwhile, issued a statement denying that it has permitted some investors to engage in market-timing. The investment firm also said it has cracked down on investors it found trying to market-time any of its funds.

"Putnam is committed to protecting shareholders in our funds from market-timing and excessive trading. We have continually deterred market-timing through a series of policies and practices,'' the firm said.

Galvin's office has been investigating Putnam since at least mid-September, when it served a subpoena on the mutual fund firm.

Last week Galvin served subpoenas on salespeople with other mutual fund companies, including Fidelity Investments and Franklin Resources. His office also is investigating the mutual fund businesses of Morgan Stanley and Prudential Securities, which is part of Wachovia and Prudential Financial.

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