Putnam Investments, the fifth-biggest
U.S. mutual fund company, may be charged with securities fraud
“within days” for its role in alleged improper fund trading,
Massachusetts Secretary of the Commonwealth William Galvin said.
Putnam, a unit of Marsh & McLennan Cos., would be the first
mutual fund company in the country charged with wrongdoing in the
broadening investigation of the $7 trillion industry. Boston-based Putnam, led by Chief Executive Officer Larry Lasser, said
in a statement that it has done nothing illegal.
“The investigation is advancing very rapidly,” Galvin said
in a telephone interview. “We’re making a lot of progress.”
The possible action against Putnam follows charges against
four individuals by New York Attorney General Eliot Spitzer in
his probe of fund trading practices. Securities and Exchange
Commission Chairman William Donaldson has said he’ll go after
anyone who profited from mutual fund prices that weren’t
available to all investors.
Massachusetts regulators are investigating trading in
Putnam’s international funds to determine whether the company
allowed some investors to make short-term trades that hurt long-term shareholders. Putnam may be charged with two counts of civil
securities fraud, The Boston Globe reported today, citing
two unidentified sources involved in the inquiry.
Putnam said it has identified three clients who made
excessive short-term trades during the past six years. The
company’s internal investigation determined that nothing illegal
occurred.
Putnam said it was able to stop the excessive trading in two
instances and faced “difficulties” curbing the activity in the
third case. The company didn’t identify the three clients.
“Putnam did not receive any financial benefit nor did it
engage in any financial arrangement to allow late trading or
market timing with any client or participant,” the company said.
Sept. 3 he charged that New Jersey hedge fund Canary Capital
Partners LLC made hundreds of improper trades. The fund’s manager
paid $40 million to settle the case without admitting guilt.
Spitzer has also charged a Bank of America Corp. broker for
helping Canary and obtained guilty pleas from a former hedge fund
trader at Millennium Partners LP and the former vice chairman of
Fred Alger Management Inc.
Last week, Galvin’s office issued subpoenas to salespeople
at Fidelity Investments, the biggest U.S. mutual fund company,
and Morgan Stanley as well as to a former salesperson at Franklin
Resources Inc. His office’s investigation began by looking at
mutual fund trading by brokers at Prudential Securities’ Boston
office. The three salespeople may have been coaching the
Prudential brokers to get around fund trading restrictions.
“The investigation has moved from brokers and sales
practices to the funds themselves and practices of the funds,”
Galvin said.
Putnam has had the biggest customer withdrawals of any fund
company this year and in 2002, according to Financial Research
Corp. in Boston. The company’s funds were among the worst
performers during the stock market’s three-year slide and four of
Putnam’s five biggest funds invested heavily in technology
shares.
Any charges against Putnam could lead to lawsuits from
shareholders, according to Thomas Dubbs, a partner at Goodkind,
Labaton Rudoff & Sucharow in New York.
Bloomberg News
