Massachusetts Treasurer Timothy P. Cahill today will recommend that the state pull $1.7 billion out of Putnam. The burgeoning scandal involving frequent market-timing trades by Putnam money managers, including one who supervised Massachusetts' investments, "brings into question the ethical standards and compliance procedures at Putnam," Cahill said. "It worries us for what could be in the future, and we're concerned about potential turnover in the company."
Public pension funds in five states and in New York City have also either put Putnam on a "watch list" to be fired, or are closely reviewing the allegations and plan to grill Putnam officials about the trading abuses. The California Public Employees Retirement system, the nation's largest public pension fund, for example, is expected to decide next month whether to keep the firm as manager of some $1 billion.
Cambridge-based New England Pension Consultants, which advises 190 public, corporate, union, and other institutional plans with more than $150 billion in assets, recently advised clients in a letter to "terminate Putnam Investments for international equity" investing. (Putnam also serves as the administrator for the retirement fund of some unionized Globe employees, including its newsroom staff.)
The brewing clients' revolt, as well as the stunning nature of the state and federal charges, are raising questions about the leadership of Lasser, the intense, demanding -- and to some critics, overbearing and overpaid -- chief executive of Putnam who took over a sleepy Boston investment house 18 years ago and built it into the fifth-largest mutual fund firm in the country. In the past five years, Lasser's salary and bonuses have exceeded $100 million.
"Somebody's going to have to take the fall," said Donald Sowa, an investment adviser in East Providence, R.I., whose clients have $52 million in assets at Putnam. He is still giving Lasser the benefit of the doubt. But if the timing "was brought to his attention three years ago, and he ultimately said, `These trades aren't hurting shareholders,' I think the board of directors for the sake of the company would say, `We're sorry, the ax falls here,' " Sowa said.
Despite his outsized compensation -- Lasser, 60, is one of the highest paid executives in the mutual fund industry -- he disdains many of the traditional corporate perks and flashy displays that often accompany such wealth. His management retreats involve long days of meetings and no golf rounds. He is known to write searing memos, internally dubbed "Lassergrams," to admonish a fund manager with low rankings or the staff for failing to pick up trash in a hallway.
One former senior Putnam fund manager, who was not involved in market timing and spoke on condition of anonymity, said few people knew about the timing by several international fund managers. For well-paid managers already pulling down eight-figure pay, this executive said, "I think it was more recreational, like other people playing the lottery. I can understand the temptation for people who like to trade. That's what we do."
Lasser's fate will be determined by Putnam's publicly traded parent, Marsh & McLennan Cos., a giant New York brokerage firm that stood by Lasser during Putnam's performance debacle, allowing him to remain at the top while many of Putnam's top managers were replaced. Under Lasser, Putnam has been a strong contributor to Marsh, accounting for a fifth of Marsh's operating income so far this year. Some of Putnam's flagship funds posted eye-popping returns in 1999; Voyager and Vista each gained more than 50 percent. But in the past three years, many of its domestic and international stock funds performed worse than their peers, according to Lipper Inc., leading investors to withdraw billions from Putnam funds.
Marsh shares have dropped 8.2 percent since news of the investigation into Putnam was first disclosed last month. Lasser also serves as a member of the parent company's board.
Marsh & McLennan has repeatedly declined to comment on Lasser's standing, as have several of Lasser's colleagues on the board of directors. But in an e-mail message obtained by Bloomberg on Tuesday, company CEO Jeffrey Greenberg expressed "great confidence in Putnam and its people."
Sowa and other investors and industry specialists said Lasser hasn't fully explained publicly how he handled the employees' trading when the company first learned of it in early 2000.
On Tuesday, Putnam became the first mutual fund company to be charged with violating securities laws for allowing two money managers to make excessive short-term trades in the company's mutual funds. Massachusetts and federal regulators also charged the two money managers, Omid Kamshad and Justin M. Scott, with fraud. Putnam has denied the charges, saying that while its systems may not have been "100 percent effective" in catching market timing trades by employees, the failures do not amount to fraudulent behavior. Kamshad's attorney has said he will dispute the charges, and Scott's attorney declined to comment.
Regulators say one of the most damning parts of their case is that both Kamshad and Scott continued to make questionable trades after Putnam executives said they had stopped such activity and notified the two and other investment professionals that market timing violated company policies. Regulators also said that Putnam had weak systems to detect and stop such trading by employees.
On Tuesday, Putnam spokeswoman Nancy Fisher said, "We believe Larry was informed in 2000 that there was an issue in trading in the investment department but that it had already been taken care of."
Lasser has said little publicly about his role in the unfolding scandal, and declined repeated requests for interviews. In the closest he's come to publicly taking blame for the mess so far, Lasser wrote in a letter to clients this week that, "We are embarrassed and feel terrible about this," and went on to say, "a few have caused me, our firm and more importantly, our customers, great anguish."
In explaining the time lag between the employees' trades and their departures, Lasser wrote, "time and standards change, and today we come to a different decision."
Yet legal and corporate governance specialists said Lasser's conduct is in the spotlight. "He's responsible for insuring an efficient system of oversight is in place and is functioning," said Timothy Hoeffner, an attorney at the Philadelphia firm of Saul Ewing LLP who represents investment companies. "And clearly he has some questions to answer as to why it didn't operate the way it should have."
In its complaint Tuesday, the SEC said Putnam "failed to disclose this potentially self-dealing securities trading to the boards of the mutual funds it managed." Lasser is a Putnam Funds trustee.
"He's got a problem with his board," said Jay Lorsch, a Harvard Business School professor and specialist on corporate boards and governance, who once had Lasser as a student. "If he did know, then obviously he's culpable," Lorsch added. "He's as responsible as anybody else, I think that's pretty clear. In 2000 he had an absolute responsibility to do something about it. Like everything else that goes wrong, it has to be at his doorstep. It's the way the world works these days."
Putnam Fund Trustees chairman John A. Hill has said the board is conducting its own independent investigation of the trading abuses. Lorsch said the trustees have to find out: "What did Larry know. What did Larry do? And did he do enough?"
Some in the business community think Lasser will withstand the scrutiny. Thomas H. Lee, a Boston leveraged buyout executive who is a business associate and friend of Lasser's, calls Lasser "a highly ethical individual." In Lee's view, Lasser's job is not in jeopardy. "I feel his reputation in the industry and at MarshMac are quite strong."
But corporate specialists said that ultimately, the CEO is responsible for enforcing the rules of a company and informing the board of directors, or in this case the fund trustees, of a breach of protocol. "At a public company you would clean house. It would mean a lot of people would lose their jobs," said Charles M. Elson, a leading authority on executive accountability who directs the Weinberg Center for Corporate Governance at the University of Delaware. "The buck stops with the CEO."
Andrew Caffrey can be reached at caffrey@globe.com. Material from Globe wire services was used in this report.
© Copyright 2003 Globe Newspaper Company.
