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Putnam Investments may face fraud charges

By Aaron Pressman
Bloomberg News

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BOSTON — Putnam Investments, the fifth-biggest U.S. mutual-fund company, might be charged with securities fraud "within days" for its role in suspected improper fund trading, Massachusetts Secretary of the Commonwealth William Galvin said.

Putnam, a unit of Marsh & McLennan, 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. "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 investigation of fund trading practices. Securities and Exchange Commission (SEC) Chairman William Donaldson said he would 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 yesterday, 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 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.

One of the three instances involved retirement plans overseen by a unit of Fluor for 11,000 workers at about 10 outside companies working on the cleanup of the Hanford nuclear-waste site in Washington state, Fluor spokesman Jerry Holloway said.

Putnam, which manages the retirement plans, told Fluor's Fluor Hanford unit last year that "there were a small number of employees Putnam had determined were market timing," Holloway said. "Fluor worked with Putnam to make some changes in the administration of the plans to eliminate or mitigate that activity."

Fluor provided records to Putnam that Galvin sought under the subpoena, Holloway said.

Putnam has had the biggest customer withdrawals of any fund company this year and in 2002, according to Financial Research 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, said Thomas Dubbs, a partner at Goodkind, Labaton Rudoff & Sucharow in New York.

"The mutual-fund industry has for too long not been the subject of appropriate regulatory scrutiny and vigorous enforcement," said Dubbs, whose firm has filed suits against some of the firms named in Spitzer's investigation.

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