Settlement, new trouble for Putnam
Galvin rips deal with SEC, vows more charges
Putnam Investments, the Boston mutual fund firm at the center of investigations into trading abuses that have rocked the industry, agreed to a partial resolution of fraud charges brought by the Securities and Exchange Commission yesterday. But that settlement was immediately criticized as too lenient by Massachusetts Secretary of State William F. Galvin, who said he is preparing to bring additional charges against the nation's fifth-largest fund company after discovering more employees making excessive short-term trades in company funds.
"This is the same old ineffective enforcement we've seen time and time again," said Galvin, a frequent SEC critic. "The SEC is more interested in protecting the securities industry than exposing it. It's very hard for me to believe they have thoroughly investigated the facts in a little over a week."
Galvin, who also filed fraud charges against Putnam last month for allowing money managers to rapidly trade in and out of mutual funds they supervised, said he has uncovered more wrongdoing at the firm. "We're in a position to bring additional charges against Putnam relating to other officers' activities," he said. A person involved in the investigation said Massachusetts is focusing on trades made by Putnam's general counsel, William H. Woolverton.
Woolverton did not return a call seeking comment. But Putnam chief executive Charles "Ed" Haldeman Jr. said that unlike the money managers who often held shares in funds for just a few days, Woolverton went at least 60 days between buying and selling shares in international equity funds, known as round-trip trades. "There were a small number of international round trips," Haldeman said, "and we did not think that met the definition of market timing."
Galvin and New York Attorney General Eliot Spitzer, who broke open the issue of abusive trading practices in the mutual fund industry in early September, have been critical of the SEC and its failure to police the securities industry in recent months, especially after it ignored a tip it received in March about market timing at Putnam. Ten days ago, the SEC forced the longtime administrator of its Boston office, Juan M. Marcelino, to resign over his handling of the Putnam case. Spitzer also criticized the SEC settlement, saying it "completely fails to address" the "crucial" issue of fees that Putnam and other mutual funds charge investors, and that the measures agreed to by Putnam "represent only a starting point for needed industry reforms."
SEC officials defended the settlement and the speed with which it was reached. "It was important to act quickly here to immediately address problems at Putnam," said Peter Bresnan, the acting administrator of the SEC's Boston office, who noted Putnam is still liable to pay restitution and civil penalties, and the SEC continues to investigate the firm. He said Putnam will eventually have to acknowledge its conduct at a later hearing on civil penalties. "They in effect will be saying at that hearing, `we'll acknowledge our liability.' They won't be able to get up there and say we didn't do it."
A quick settlement was important for Putnam, which saw investors pull about $14 billion in assets out of the company in the first week of November alone. "This agreement underscores our commitment to address the issues at Putnam swiftly and thoroughly," Haldeman said separately in a statement.
Others were surprised Putnam reached a deal just two weeks after the SEC filed its charges. "That suggests to me that Putnam did very little negotiation and said `We'll do whatever you require' to the SEC," said Burt Greenwald, a mutual fund consultant in Philadelphia.
As part of the SEC settlement, federal regulators found Putnam committed civil securities fraud by failing to disclose that six money managers repeatedly traded in and out of mutual funds, including four in funds they supervised, and by failing to stop such trading.
While not contesting the order, Putnam did not admit to or deny the SEC's findings.
The amount of restitution will be determined at a later date by an independent consultant hired with the joint approval of the SEC and the trustees of the Putnam funds.
The civil penalties will be determined by a government administrative law judge after the later hearing on the settlement order.
Putnam agreed to new restrictions that require portfolio managers who own shares in the mutual funds they manage to hold them for a minimum of one year, and other investment professionals to hold shares for at least 90 days. The settlement "clearly makes our employees long-term investors," said Haldeman who was installed in the top post on Nov. 3 after Putnam's parent, Marsh & McLennan Cos., forced former chief executive Lawrence J. Lasser to resign.
The SEC alleged that at least two Putnam money managers, Justin M. Scott and Omid Kamshad, made dozens of in-and-out trades in international mutual funds they directly supervised. SEC fraud charges against the two are pending. Scott's attorney declined to comment, and Kamshad's didn't return a call seeking comment. Such rapid trading reaps quick profits for the investors, but lowers the returns for other participants in the fund. Most funds discourage frequent trades to protect the interests of their investors.
The settlement also requires Putnam's chief compliance officer, in this case, its general counsel Woolverton, to report all breaches of fiduciary duty and securities law violations to the trustees.
Putnam will also be required to hire an outside consultant every two years to review its compliance and control procedures and other policies, and develop other new external and internal oversight bodies to guard against prohibited activity.
Putnam also agreed to conditions on its trustees that it has already in place: that its chairman be an independent member, that is, not a company insider, and that 75 percent of its board be made up of independent members.
Andrew Caffrey can be reached at caffrey@globe.com; Jeffrey Krasner at krasner@globe.com. 