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Putnam to Pay $110M to Settle Allegations

Apr 8, 2004 | AP

Putnam Investments will pay $110 million to settle federal and state allegations of improper trading in the case that launched the scandal over so-called market timing in the mutual fund industry.

Under the settlements announced Thursday, half the money $5 million in ill-gotten gains and $50 million in penalties will go to investors to complete a settlement with the Securities and Exchange Commission that Putnam tolerated improper trades by fund advisers.

Putnam also will pay $5 million in restitution and a $50 million fine to settle Massachusetts allegations that it failed to halt market timing by members of a labor union who had 401(k) retirement plans through the Boston-based company.

In October, Putnam became the first investment firm formally accused of wrongdoing in the now-widespread scandal over market timing the use of quick, in-and-out trades that skim profits from long-term shareholders. The practice is not illegal but most funds have policies against it.

Since then, other companies have settled for far larger amounts including Boston-based MFS Investment Management, which agreed to pay $350 million over state and federal regulators' allegations of market-timing. Alliance Capital Management agreed to pay a $250 million fine and reduce fees by $350 million over five years.

But analysts said the Putnam settlement is significant, considering the relatively small amount of actual financial damage to investors.

"On the one hand you could argue that what happened with Putnam was far less serious in terms of money," said Russ Kinnel, director of fund research at Morningstar. "But at the same time, they allowed some fiduciaries who were running the funds to get away with it."

Mercer Bullard, an industry watchdog with Fund Democracy, questioned why the fine was so much lower than the MFS penalty.

"It is odd that they would settle for less in this case, because we had high-level executives engaging in market timing and even higher level executives covering it up," Bullard said.

In its settlement with the state, Putnam acknowledged to regulators for the first time that it had tolerated market timing by some managers and fund participants. The separate settlement between Putnam and the SEC did not include such an admission.

"Not only was Putnam the first major market timing case brought in the country but in general in the regulation of securities companies, there has been this pattern where even when the wrongdoing is obvious, the firms have generally refused to acknowledge or admit it," said Secretary of State William Galvin, the state's chief securities regulator. "We hope we have turned a new page."

Putnam had previously reached a partial settlement with the Securities and Exchange Commission, but that settlement did not immediately determine the amount of the fine. At the time, state regulators sharply criticized the agreement as too lenient.

Thursday's settlements "reflect our commitment to put these matters behind us and continue to move forward as a firm focusing on rebuilding investor confidence and delivering consistent, dependable, superior investment performance over time," Putnam president and chief executive Ed Haldeman said.

Ian Roffman, the lead trial counsel for the SEC in the case, said Putnam shareholders would receive the entire $55 million of the SEC settlement. The figure reflects both the $5 million lost by investors as a direct result of the market timing and the $50 million in management fees paid to Putnam while it violated its own policies against market timing.

Massachusetts is still investigating Putnam for the potential abuse of fees that most mutual fund investors are required to pay, Galvin said. It is also possible the company could face further enforcement action in New York.

Since the allegations surfaced last fall, Putnam's assets under management have declined to $227 billion from a high of $277 billion. The company has fired 15 employees for their role in the improper trading.

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