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Problems might not be over for mutual-fund giant Putnam

By Brooke A. Masters
The Washington Post

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But the firm's troubles might not be over. Massachusetts Secretary of the Commonwealth William Galvin, who still has a pending securities fraud complaint against the firm, harshly criticized the deal. And two sources said his office is investigating whether Putnam's general counsel also was profiting personally from trading in the firm's funds, an allegation that Putnam officials vigorously denied.

The settlement requires Putnam to tighten rules against employee trading and strengthen its compliance department and board of trustees. The SEC and Putnam also agreed that an independent consultant would determine how much investors should be reimbursed and left the question of a financial penalty for a later date.

The settlement came on the same day that a Pennsylvania money management firm, Pilgrim Baxter, said its two founders had stepped down as the result of allegations about improper trading in the company's mutual funds.

The SEC and state regulators have been trying to work together to uncover and punish trading abuses in the $7 trillion mutual-fund industry since New York Attorney General Eliot Spitzer revealed Sept. 3 that some fund companies had cut secret deals allowing hedge funds to make short-term trades that siphoned profits from ordinary investors.

But yesterday's settlement, which did not include Galvin even though his office was the first to begin investigating Putnam, laid bare a continuing rivalry.

Both Galvin and Spitzer criticized the settlement, saying it didn't go far enough to punish Putnam and didn't address broader problems in the mutual-fund industry such as high management fees.

"The message that is being sent by this terrible, embarrassing compromise is that the industry comes first and the interests of Mr. and Mrs. America come second," Galvin said.

And Spitzer, who also had sought information from Putnam, said, "I am disappointed that this happened. This document is not a settlement with me. It does not address the most fundamental issue, which is, how do you control fees?"

SEC Chief of Enforcement Stephen Cutler said the settlement was narrowly targeted at the issue of self-dealing at Putnam and did not preclude a large fine and industrywide changes later on. "This is not intended to be an industry template, and it includes very serious relief for investors for all the problems alleged in the complaint. The relief we are getting, we are getting now, and we haven't given up anything."

The commission has used the delayed penalty mechanism in the past — WorldCom agreed last year to a deal that left the fine to be determined later and then ended up paying one of the largest settlements in SEC history.

Putnam's new chief executive, Charles Haldeman, said in an interview, "This agreement is good for Putnam and it's good for the industry. We hope it will be one of the first steps in many toward restoring the good name of Putnam."

Haldeman strongly defended Putnam General Counsel William Wolverton, who is the subject of Galvin's latest inquiry into market timing, a trading practice in which investors generally buy and sell shares within a couple of days in an effort to exploit the fact that fund share prices sometimes lag behind the value of the fund's underlying holdings. Market timing is not illegal, but allowing insiders to do it while preventing others may constitute self-dealing or violate disclosure rules.

Internal Putnam e-mails made available to The Washington Post suggest that Wolverton was actively trading in his deferred compensation account in early 2000 but do not show exactly what he was doing. Some of the trades were concentrated in Putnam's international funds, which are particularly vulnerable to lagging prices because of time-zone differences.

Haldeman said the firm's preliminary investigation found that Wolverton held all of his international fund purchases for at least 60 days, not the few days that are usually seen in market timing cases.

"From what I have seen, we aren't talking about market timing. (The accusation) seems unfair to me," Haldeman said. A Putnam spokeswoman said Wolverton would not comment.

Meanwhile, Putnam is apparently no longer providing the data used to track fund outflows on a weekly basis.

Robert Adler, president of AMG Data Services of Arcata, Calif., which compiles weekly flow figures on mutual-fund companies, said yesterday that Putnam told him it would now report that information to AMG only on a monthly basis.

Last week, AMG figures showed investors had pulled $4.4 billion from the company.

On Monday, Putnam said it had $263 billion in assets under management — $14 billion less than what it reported at the end of October. Experts were expecting to see figures yesterday for the week ending Wednesday, which could have indicated whether the outflows from Putnam were a one-time hit or the start of a trend.

A Putnam spokeswoman did not immediately return a message seeking comment on the flow data.

Separately, the state of Nevada's workers pension fund fired Putnam yesterday as manager of its $400 million investment in international equities.

And Strong Capital Management, whose founder is also under investigation by Spitzer, lost a contract to manage $134 million for the Oregon College Savings Board.

Material from The Associated Press and Bloomberg News was used in this report.

Copyright © 2003 The Seattle Times Company