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Putnam to Pay $110M In Penalties

Apr 9, 2004 | USA TODAY

Putnam Investments, the USA's sixth-largest mutual fund company, Thursday admitted that it allowed portfolio managers to market time its funds and agreed to pay $110 million in penalties and restitution to settle charges with state and federal regulators.

Under agreements with the Securities and Exchange Commission and Massachusetts Secretary of State William Galvin, Putnam will pay each agency a $50 million fine and $5 million in restitution that will go to the funds affected by the wrongdoing.

In regulatory settlements, companies typically do not admit or deny the charges. But as part of its settlement with Galvin, Putnam admitted that it allowed some portfolio managers and investors to market time its funds. Galvin said the admission is a "key element in restoring the trust shareholders should be able to have in the managers of their money."

In October, the SEC and Galvin accused Putnam and two former portfolio managers of securities fraud related to improper market timing. Market timing involves frequent trading, often in international funds, to exploit "stale" prices due to time zone differences. It's legal but might violate a fund's rules; market timers often profit at the expense of long-term investors.

The regulators alleged that market timing by Putnam employees began in 1998, and by early 2000, the firm was aware of it. Yet, Putnam failed to disclose the activity to fund shareholders or the board of directors, they said. Galvin also accused Putnam of allowing several retirement plans it administered to engage in market timing despite policies in its prospectus against the practice.

In November Putnam forced out CEO Lawrence Lasser and appointed Charles "Ed" Haldeman as chief. The firm subsequently reached a partial settlement with the SEC, agreeing to beef up corporate governance and compliance. It also said it would lower fees and improve fund disclosure.

In a statement Thursday, Haldeman said the settlements with Galvin and the SEC "reflect our commitment to put these matters behind us and continue to move forward."

The penalty is large relative to the damages. Stephen Cutler, chief of the SEC's division of enforcement, said the penalty "makes clear that self-dealing by mutual fund managers will be severely punished."

Galvin's office continues to look into expense rebates paid by Putnam to some retirement plans. And in a recent SEC filing, Putnam parent Marsh & McLennan disclosed that Putnam has received subpoenas and requests for information from law enforcement agencies and regulators in New York and West Virginia. The SEC is also looking into Putnam's fee practices.

Charges against the two portfolio managers, Omid Kamshad and Justin Scott, also are pending.


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