- The Washington Times - Tuesday, October 28, 2003

The Securities and Exchange Commission and state regulators yesterday charged Putnam Investments, one of the nation’s most prominent and widely held mutual funds, with securities fraud in connection with secret, illicit trading by its officers.

It was the first formal action against such a caretaker of American retirement and savings funds. Putnam, the fifth-largest mutual fund company, has 12 million shareholders and $272 billion under management in more than 100 funds.

The case involves Putnam’s practice of allowing fund managers to trade rapidly in and out of shares, even though its policy prohibits such trades by ordinary investors. The SEC and Massachusetts authorities contend that Putnam committed securities fraud by failing to disclose the personal trades by its officers, though they were potentially detrimental to shareholders.

The fund managers named in the lawsuits are Justin M. Scott, 46, chief investment officer of Putnam’s International Equities Group, and Omid Kamshad, 41, chief investment officer of its International Core Equity Group.

The SEC in its complaint before the U.S. District Court in Boston said the two officers and four other fund employees engaged in secret trading that yielded more than $1 million in illicit profits. It is seeking fines, disgorgement and other penalties against the mutual fund and the officers, both of whom were fired by Putnam last week.

“There are some 95 million Americans who are invested in mutual funds, representing half the households in this country, and they deserve better,” said Stephen M. Cutler, the SEC’s director of enforcement. “We’re going to continue to be aggressive in pursuing appropriate enforcement actions where mutual funds abuse the trust of those investors.”

Regulators contend that the two men used information not publicly available about the mutual funds’ holdings to profit personally in frequent trades that date as early as 1998.

Mr. Kamshad’s personal trading continued until last March, the commission said, even though Putnam officials said last week that the trades by fund executives had stopped in 2000.

William F. Galvin of the commonwealth of Massachusetts, which also sued Putnam and the fund managers for civil securities fraud, called the fund’s practices outrageous and deceitful.

“Mutual should mean equal opportunity for gain and loss. There should not be two classes of investors,” he said. Putnam declined to comment on the charges yesterday.

The suits against Putnam are the latest in a series of regulatory investigations that have rocked the mutual fund industry.

In September, the New York attorney general, Eliot Spitzer, disclosed an investigation by his office that had found some mutual funds allowing certain large investors to engage in “market timing” trades, capitalizing on price discrepancies that can occur in funds holding securities whose values are not updated quickly enough.

Since then, one mutual fund executive has pleaded guilty and several dozen fund employees have been fired at a variety of firms.

Last week, the SEC said its recent investigation into fund practices has found widespread improprieties. The commission said its investigation into Putnam is continuing.

According to the SEC’s complaint, Mr. Kamshad made 38 trades in Putnam funds, including at least four funds that he managed or helped to manage. Regulators said he realized “hundreds of thousands of dollars in gains” from the trades.

When Putnam confronted Mr. Kamshad about his frequent trades in early 2000, the manager said he would stop the trading.

But he made 20 additional trades between February 2000 and March 2003, the complaint states.

The other portfolio manager, Mr. Scott, completed 35 trades in Putnam funds, including some that he helped manage, also reaping hundreds of thousands in gains. Mr. Kamshad reported to Mr. Scott.

While the two officers were dismissed by Putnam along with two others, the company said two additional employees who also engaged in personal trades remain in their jobs.

According to the lawsuits, internal controls at Putnam that are supposed to protect its shareholders from self-dealing fund managers were minimal. Putnam only revised its code of ethics to include a prohibition on employee market timing of funds in April 2002, two years after it first learned that some of its managers were conducting such trades, regulators said.

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