Putnam facing federal probe

State pension officials in Massachusetts and Vermont, and several other local public employee retirement boards and some corporate retirement plans formally decided yesterday to fire Putnam as an investment manager, particularly for international investments. Two high-level managers of Putnam's international funds were charged this week with fraud for alleged rapid trading into and out of the funds they managed, a practice known as market timing.

Legal specialists said yesterday that since the US Securities and Exchange Commission and Massachusetts regulators are already pursuing civil charges against Putnam, federal prosecutors are probably conducting a criminal probe of the trading practices.

The US attorney's office "most likely in this instance is going to be focused on a criminal investigation," said Timothy Hoeffner, an attorney at the Philadelphia firm of Saul Ewing who represented Enron Corp. on many of the issues related to the collapse of the energy company.

Hoeffner said prosecutors are likely trying to determine whether Putnam or the money managers were "defrauding their investors by making representations about not allowing market timing, while the fund managers at the same time were engaging in that specific conduct" with Putnam mutual funds.

Putnam yesterday said it had received the subpoena "relating to trading in the shares of Putnam mutual funds, and it intends to cooperate fully with the inquiry." A Putnam spokeswoman, Nancy Fisher, said the subpoena did not indicate whether the US attorney is conducting a criminal or civil investigation. The US attorney for the Southern District of New York declined to comment.

Federal prosecutors in Boston also have sought information on Putnam from Massachusetts securities regulators, who have compiled a voluminous record investigating market timing at Putnam, according to a person involved in the probe. A spokeswoman for the US attorney's office in Boston did not return messages seeking comment.

The federal prosecutors' interest in Putnam is the latest evidence of the escalating scandal in the mutual fund industry. Yesterday a spokeswoman for New York Attorney General Eliot Spitzer said he is expected to bring charges against Richard Strong, chairman of the Wisconsin firm, Strong Capital Management, for improper trading in mutual funds. If so, Strong would be the highest-ranking executive in a fund firm to be accused of wrongdoing.

Putnam already was grappling with the fallout from the civil actions brought by Massachusetts and the SEC on Tuesday. The two regulators filed separate complaints accusing Putnam and two money managers, Omid Kamshad and Justin M. Scott, of allowing or engaging in rapid trading of mutual funds supervised by the two money managers from 1998 to as late as 2003, despite company policies that prohibit such frequent trading. Massachusetts also charged Putnam with fraud for allegedly allowing members of a New York union to market time hundreds of millions of dollars in trades over three years.

Scott's attorney declined to comment and Kamshad's lawyer didn't return calls yesterday. Yesterday, Springfield's retirement board pulled $34 million in international investments from Putnam, but will continue to keep another $34 million in fixed-income investments at the firm. Vermont's teachers retirement board pulled $91 million, while the Massachusetts Port Authority retirement board yanked $14 million on Wednesday.

The Massachusetts state pension fund voted unanimously to fire Putnam from managing around $1.8 billion in small-cap and international funds. Kamshad was one of the lead managers of Massachusetts' international portfolio. "We have to have confidence in the people we are paying large fees to manage our money, and we don't have that confidence," said pension board chairman and state treasurer, Timothy P. Cahill.

Rhode Island's state pension fund will hold a special meeting this morning to decide whether to keep its $651 million at Putnam, while Connecticut edged closer to a similar decision. Connecticut Treasurer Denise L. Nappier "has serious and substantial concerns about Putnam's continued viability as a manager of" $277 million in pension funds, said spokesman Bernard Kavaler.

Consultants CRA RogersCasey and Wilshire Associates, both of which have hundreds of corporate, public, union, and other plans as clients, have advised them to either fire Putnam as an manager of international funds, or consider replacing Putnam, officials said. But, "one of the things the clients ask when we talk about this is, `Where do we put the money?' " said Joseph O'Reilly, who runs CRA RogersCasey's Northeast office. The consultants declined to identify corporate plans that have pulled out from Putnam.

Even before the current withdrawals, Putnam's investors had been fleeing the firm's funds, according to data from Financial Research Corp. Investors have pulled a net $8.8 billion out of Putnam funds this year, including $731 million in September. Many of Putnam's funds performed worse than their peers during the bear market of the past few years.

For now, retirement funds are putting the Putnam money into index funds managed by State Street Global Advisors and others, while the industrywide investigations continue.

Last week Putnam said four managers, including Kamshad and Scott, would be leaving the firm, and that it would reimburse the mutual funds of the $700,000 in profits that six employees made from excessive short-term trades. The company declined to quantify how much business it has lost in the past few days. But Fisher, the spokeswoman, said, "We are disappointed about their decisions but hope we would have the opportunity to manage investments for these clients in the future."

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