Putnam Investments said it’s ousting
six money managers for making improper trades for their own
accounts amid a widening investigation of the $7 trillion mutual
fund industry.
The fund managers earned a combined $700,000 in profits from
the “market timing” trades, many of which involved transactions
more than three years ago in shares of the Boston-based company’s
funds, Putnam spokeswoman Nancy Fisher said. She declined to
identify the money managers, or say whether they’re being fired.
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Companies including Putnam, Merrill Lynch & Co., Alliance
Capital Management Holding LP and Bank of America Corp. have fired
or suspended more than 30 employees as regulators in Massachusetts
and New York, as well as the U.S. Securities and Exchange
Commission, examine the trading practices at about 80 companies.
“This is people in our industry thinking that there are other
ways to make money for themselves,” said Richard Burns, chief
investment officer at Baillie Gifford & Co. in Edinburgh, which
manages about $42 billion for clients and holds shares of Marsh &
McLennan Cos., Putnam’s parent. “It’s very bad. It destroys the
man in the street’s trust in the financial system.”
Putnam, the fifth-biggest U.S. mutual fund company with $272
billion of assets, is being probed for possible securities fraud by
Massachusetts Secretary of the Commonwealth William Galvin. “We’re
looking at individuals and the company,” Galvin’s spokesman Brian
McNiff said. “We expect to file charges by Tuesday.” Putnam would
be the first mutual fund company charged with wrongdoing in the
industrywide probe.
The trading records of Putnam managers Justin Scott and Omid
Kamshad have been subpoenaed, The Boston Globe reported without
identifying its sources. Scott, a managing director in the U.S.
stock fund group, and Kamshad, the chief investment officer for
international equities, weren’t available for comment.
Alliance Capital in New York last month suspended the manager
of the $3 billion AllianceBernstein Technology Fund after
uncovering “conflicts of interest” in short-term trading of
mutual fund shares.
Four of the Putnam managers were making inappropriate trades
in international funds that they oversaw to make combined profits
of $500,000, Fisher said. The other two managers were involved in
trades of funds that they didn’t oversee. The Wall
Street Journal has reported that the trading was detected in early 2000
and Putnam executives put an end to the practice then without
taking disciplinary action.
Galvin is 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,
led by Chief Executive Officer Larry Lasser, has said its
internal investigation found that nothing illegal occurred.
Two types of transactions are being probed by securities
regulators: market timing and after-hours trading.
The first involves making short-term trades, or buying a fund
and selling the next day. This can raise a fund’s transaction costs
and dilute the gains of long-term holders. Many funds say in their
prospectuses that they limit or discourage the practice to protect
long-term shareholders.
After-hours trading is illegal. By law, fund trades submitted
after 4 p.m. New York time are supposed to receive the next day’s
closing price to prevent an investor from taking advantage of late-
breaking news.
Regulators have uncovered instances where the Canary Capital
Partners LLC hedge fund was allowed to place late trades at the
current day’s price, a practice compared with betting on a horse
race after the horses already crossed the finish line.
Putnam said in a statement that its employees weren’t
involved in after-hours trading.
SEC Chairman William Donaldson has said he’ll go after anyone
who profited from mutual fund prices that weren’t available to all
investors.
Galvin’s office has 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 has said.
Bloomberg News
