Galvin: Market timing not `minimal'

Putnam called slow to confront the problem

By Andrew Caffrey, Globe Staff, 10/22/2003

Massachusetts Secretary of State William F. Galvin disputed Putnam Investments' contention that there was a "minimal" amount of market timing in its mutual funds, saying his investigation has uncovered "hundreds of millions of dollars" in suspect trades, and he accused the Boston company of being slow to acknowledge the problem.

Meanwhile, Putnam, the nation's fifth-largest mutual fund family, yesterday disclosed that it also is being investigated by the Securities and Exchange Commission for rapid-fire trading in its funds, a practice that Putnam and other mutual fund companies try to prevent because it hurts performance.

Galvin said yesterday he will charge Putnam "within days" with civil securities fraud for allegedly letting investors rapidly trade in and out of its mutual funds. Galvin's office, which regulates securities in the state, is expected to allege that Putnam allowed some investors to market time despite company policies that prohibit excessive trading, and that it also treated shareholders unequally by allowing some to do this trading but not others.

Shares in Putnam's parent company, Marsh & McLennan Cos., fell $1.98, or 4.1 percent, to $46.40 on news of Galvin's pending charges.

Galvin said his investigation has determined that some Putnam investors traded large sums through their retirement accounts so frequently that the aggregate value of their activities reached in the "hundreds of millions of dollars." The amounts were so large that Galvin said buy-and-hold investors in the funds were hurt because such frequent trading raises expenses for all fund holders.

Galvin's office said one Putnam investor, whom it would not identify, had over a two-year period made more than 400 trades in the firm's International Voyager fund, moving an aggregate of $338 million in and out of the fund.

"It's not an isolated incident," Galvin said. "The amount of money is significant; the number of trades are significant."

Galvin has subpoenaed Putnam for records relating to the company's management of retirement and other funds for Boilermakers union Local No. 5 in New York, union electricians in New York, and Fluor Hanford Inc., which runs the retirement plan for more than 11,000 employees working on the cleanup of a federal nuclear waste site in Washington state. Galvin also has requested account records of 11 Putnam investors, and has taken sworn testimony from an undisclosed number of current and former Putnam employees.

Galvin said he is unhappy with Putnam's explanation that its own investigation of trading from 1998 to the present determined "nothing illegal occurred."

"We are very troubled by what we see, and their attitude is not helpful," he said. "They're still trying to mitigate instead of acknowledge what they've done."

Putnam has denied Galvin's allegations, saying its investigation found only a "minimal" number of investors who attempted to market time its funds, and in particular it "worked closely" with the electricians unions and Fluor Hanford to promptly halt excessive trading by their plan members as soon as it discovered them.

The mutual fund company, however, said it had trouble shutting down excessive trading by boilermakers members because its contract with the union local did not give Putnam direct control over individual accounts. Putnam yesterday said it was reluctant to take the extreme step of closing off International Voyager and a second overseas fund to the more than 1,000 members of the boilermakers plan when only 14 were market timing. With $41 million in assets, the boilermakers plan is one of Putnam's smallest clients.

"This was management's judgment," said John Brown, head of institutional management at Putnam. "The real reason we didn't move more aggressively was there were 14 individuals" trading frequently, "and you got over 1,000 hard-working plan participants trying to save for college and retirement. The only recourse we had was to shut the funds down. We were trying to avoid that."

After more than two years of negotiations with the boilermakers local, Putnam said it did eventually shut off access to International Voyager and a second overseas fund to all members of the boilermakers plan last month.

"We know even 14 people determined to market time can create a lot of activity, and we regret we were not successful in stopping them sooner," Brown added.

Officials at the boilermakers union declined to comment.

But Galvin yesterday hinted for the first time that the activity under investigation at Putnam may not be limited to individual investors trading through their retirement accounts. Other investigations of market-timing trading by Galvin and New York Attorney General Eliot Spitzer have focused on sophisticated investors such as hedge funds rapidly moving huge sums of money in and out of mutual funds.

"It may be not just them," Galvin said of the union members investing at Putnam. "We believe it was fairly sophisticated the way it operated."

Meanwhile, SEC officials declined to comment on whether the federal agency is investigating Putnam. However, Juan Marcelino, district administrator of the SEC's Boston office, said, "We are actively looking at a number of fund companies and some brokerage firms, with respect to market-timing activities."

Andrew Caffrey can be reached at caffrey@globe.com.