Putnam agrees to $110 settlement

Putnam Investments yesterday agreed to pay $110 million to settle charges with state and federal regulators that it permitted certain clients and several of its own mutual fund managers to improperly trade Putnam funds from 2000 until last September.

The settlements, announced yesterday by the US Securities and Exchange Commission and Massachusetts Secretary of State William F. Galvin, include $10 million in restitution for investors who were harmed by market timing, or short-term trading, in Putnam funds. The other $100 million came in the form of penalties, split evenly between the state and the federal securities watchdogs. The sum represents the largest penalty yet, relative to actual harm done to customers, since the industry's market-timing scandals broke last fall.

"What distinguishes this case from other market-timing cases is that Putnam breached its fiduciary duty, by failing to disclose potentially self-dealing trading by its own portfolio managers," said David P. Bergers, associate district administrator at the SEC's Boston office, which handled the investigation. "This significant penalty imposed sends a strong message that such conduct will not be tolerated."

Putnam -- which will pay a penalty 10 times larger than the damage done to investors by the trading -- is turning out to be the Martha Stewart of market timers. Other firms charged with cheating their customers of much greater sums of money are paying similar or smaller fines. But Putnam's misdeeds have been seen as more offensive than others, with two executives found market-timing in their own funds and a big-name, highly paid chief executive, Lawrence J. Lasser, losing his job. As the first major mutual fund brand embroiled in the trading scandal, Putnam has been held up as the poster child for poor management in the fund business, which until recently had been largely untainted by scandal.

"They had a corporate culture that promoted this market timing and allowed it to occur over a long period of time," Galvin said. "In terms of degree, it's a worse offense."

Putnam executives have been eager to put the scandal behind them. The firm has endured six months of customers pulling billions of dollars out of the firm and a rigorous housecleaning by chief executive Charles "Ed" Haldeman, who took over in November, after the ouster of Lasser. Just yesterday, Putnam said Gordon Silver, a senior managing director and chief administrative officer, would retire and be replaced by James Pappas, who will be in charge of trustee relations.

In a statement yesterday, Haldeman said the settlement agreements reflect a commitment "to move forward as a firm focusing on rebuilding investor confidence" and to deliver strong investment performance. He said the firm had implemented several changes since November to protect investors and to "reinforce the right values at Putnam."

The state won a rare admission of guilt in its agreement with Putnam. The state had charged Putnam with fraud for failing to stop its own employees from market timing and for turning a blind eye while a group of union workers from the Boilermakers Local Lodge No. 5 in New York made thousands of trades in and out of Putnam funds in a retirement plan. The state said the activity was so well known in the firm's Norwood office that the 3 p.m. hour each day was called the "boilermaker hour."

Yesterday's SEC deal was part two of an agreement Putnam forged with the federal agency in November to settle charges that Putnam broke federal securities laws by failing to disclose improper trading by its own managers as far back as 2000. Under the first part of the agreement, Putnam instituted stricter limits on employee trading: Staff members who previously had been able to trade their accounts daily must now hold their fund shares for 90 days.

The firm has added penalty fees to make short-term trading unattractive to insiders and outsiders; it has improved its compliance and ethics standards, replaced virtually all of the firm's top executives, and cut fund expenses by $35 million.

Putnam's independent trustees, who oversee the funds on behalf of investors, have conducted their own review of the funds and plan to hire additional staff to help them monitor compliance matters in the future.

John Hill, the independent chairman of the Putnam Funds, said in a statement: "The trustees of the Putnam Funds are pleased that Putnam Investments has reached a final settlement with the SEC and Massachusetts with respect to all allegations regarding improper trading." He noted: "We are confident that strong procedures are now in place at Putnam to prevent any recurrence of similar problems in the future."

State Treasurer Timothy P. Cahill, who fired Putnam as an adviser to the state pension fund after the market-timing revelations, yesterday said the government's fines seemed fitting. "I think it's good they can put most of their troubles behind them." He said the state would consider doing business with Putnam again in the future.

Putnam still faces an ongoing investigation by the state into fee rebates it allegedly made to certain retirement-plan clients.

Putnam drew the worst of the headlines over its failure to stop market timing, but it was hardly the worst offender in terms of dollars.

Bank of America Corp., the merger partner of FleetBoston Financial Corp., in its recent market-timing settlement with regulators agreed to pay $250 million in restitution to investors, plus a $125 million fine. MFS Investment Management in Boston had to agree to repay customers $175 million, but its penalty was just $50 million, not counting its pledge to reduce fees in the future.

Of the $110 million Putnam agreed to pay, the SEC will devote all of its $55 million to shareholders or the funds. The state will return $5 million to the Putnam funds; the other $50 million will go into the general coffers of the Commonwealth. Per its agreement with regulators, Putnam has retained, at its own expense, Harvard Business School professor Peter Tufano as a consultant to assess the repayment of funds to investors. The firm has 10 days to name someone to disburse the funds.

Beth Healy can be reached at bhealy@globe.com. Andrew Caffrey of the Globe staff contributed to this report.