- The Washington Times - Thursday, November 13, 2003

Putnam Investments, the fifth-largest mutual fund firm in the United States, agreed yesterday to make restitution to investors and adopt reforms in a partial settlement of securities fraud charges made by the Securities and Exchange Commission.

The SEC said it will also fine the company for allowing its employees to earn profits by secretly trading fund shares at the expense of millions of people who invested in the funds. Investors burned in the scandal have pulled more than $4 billion out of Putnam stock funds in the last month.

The settlement, the SEC’s first against a major mutual fund, comes as the scandal widened to encompass another major investment company. FleetBoston Financial Corp. said its subsidiaries have been subpoenaed by the SEC, the New York attorney general’s office, and other state and federal regulators investigating illicit trading of mutual funds.

Half of all Americans own stocks, mostly through mutual funds that collectively hold $7 trillion in savings for retirement, home purchases and college education. Most of the reported abuses at a growing list of funds were committed by employees or institutional clients, whom the funds helped to reap profits from after-market trading opportunities not afforded to small investors.

The burgeoning scandal has raised the specter of a loss of confidence by small investors that could cascade into a run on mutual funds, which would damage the stock market and the broader economy. So far, only Putnam and the Janus mutual funds have seen major redemptions of fund shares. Members of Congress have been calling for strong action by the SEC to prevent the scandal from snowballing.

The SEC’s enforcement chief, Stephen Cutler, while conceding that the settlement goes only part way toward redressing the wrongs at Putnam, said it nevertheless “provides real and substantial protections for mutual fund investors. … We are reserving all our rights to get penalties and other monetary relief.”

The settlement provides a preview of regulatory measures the SEC may impose on the mutual fund industry in the wake of the scandal, which has led to the suspension or firing of more than 30 fund officers in the last two months, including Putnam Investment’s former chief executive officer, Lawrence Lasser.

Just yesterday, two founders of the Pilgrim Baxter & Associates funds resigned after admitting they engaged in inappropriate trading. In a letter to shareholders, Gary L. Pilgrim said he, with the knowledge of co-founder Harold J. Baxter, had profited in 2000 and 2001 through the market-timed trading of mutual fund shares.

Putnam was the first company to face SEC charges. The SEC said Putnam committed securities fraud by failing to disclose trades by two former portfolio managers who took advantage of inside knowledge about the international funds they managed to generate quick profits for themselves at the expense of their customers.

In permitting the illicit trading, Putnam failed to properly supervise the managers, Justin Scott and Omid Kamshad, who have also been charged with securities fraud, the SEC said.

To curb such abuses in the future, the settlement requires that Putnam portfolio managers hold their Putnam investments for at least 90 days and hold any shares of funds they personally help oversee for at least a year.

The SEC is also requiring that the chairman and at least three-quarters of Putnam’s board of directors be independent. The company has agreed to create an internal compliance committee and to retain an independent compliance consultant to review its policies.

Putnam also agreed to hire an outside auditor who will determine how much the illicit trades cost Putnam investors and provide restitution within 195 days. The firm submitted to the settlement without admitting or denying guilt.

While the SEC’s Mr. Cutler called these “very significant remedial undertakings,” the case highlights the continuing tug of war between the SEC and Democratic leaders in Congress as well as several state attorneys general who would like to see more aggressive action against errant funds.

Massachusetts Secretary of the Commonwealth William Galvin, who has been working with the SEC in pursuing Putnam, yesterday faulted the SEC for not requiring Putnam to admit guilt and for not immediately assessing fines.

“The SEC seems far more concerned about making nice with the industry than they are in protecting investors,” Mr. Galvin told Bloomberg News. “It’s the same old story: ‘There’s no admission of guilt, they’re going to make some changes, and back out they go.’”


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