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Putnam May Face Charges of Securities Fraud

A Massachusetts probe of the mutual fund firm focuses on excessive short-term trades.

October 22, 2003|From Bloomberg News

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 Tuesday.

"The investigation is advancing very rapidly," he said.

Putnam, a unit of Marsh & McLennan Cos., would be the first fund firm charged with wrongdoing in the broadening probe of the $7-trillion industry.

Boston-based Putnam said it had done nothing illegal.

Putnam may be charged with two counts of civil securities fraud, the Boston Globe reported Tuesday, citing two unidentified sources.

Putnam said it had identified three clients who made excessive short-term trades in its funds during the last six years. But the company said its internal investigation had determined that nothing illegal occurred.

Galvin and other regulators have been examining whether some fund companies allowed favored investors to make market-timing trades in funds at the expense of long-term investors.

At Putnam, one of the three instances of excessive trading involved retirement plans overseen by a unit of Aliso Viejo, Calif.-based Fluor Corp. for 11,000 workers at about 10 outside companies that are working on the cleanup of the Hanford nuclear waste site in Washington state.

Putnam, which manages the retirement plans, told Fluor's Hanford unit last year that "there were a small number of employees Putnam had determined were market timing," a Fluor spokesman said.

"Fluor worked with Putnam to make some changes in the administration of the plans to eliminate or mitigate that activity," he said.

Putnam said it "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."

New York Atty. Gen. Eliot Spitzer last month accused hedge fund Canary Capital Partners of making hundreds of improper trades with four fund sponsors: Bank of America Corp., Bank One Corp., Janus Capital Group Inc. and Strong Capital Management.

Spitzer said the fund companies received other fee-generating business from Canary in return for facilitating its improper fund trading.

The fund companies have not been charged with wrongdoing, but Spitzer has charged a Bank of America broker with helping Canary. As his investigation has widened, Spitzer has obtained guilty pleas from a former hedge fund trader at Millennium Partners and the former vice chairman of money manager Fred Alger Management.

The investigation by Galvin began by looking at mutual fund trading by brokers at Prudential Securities' Boston office.

"The investigation has moved from brokers and sales practices to the funds themselves and practices of the funds," Galvin said.

By itself, rapid trading of mutual fund shares isn't against the law. But legal experts say a fund company could be charged with fraud if it allowed such trading by certain investors while officially telling other investors that the company did not allow, or discouraged, such trading.

Marsh & McLennan shares fell $1.98 to $46.40 on the New York Stock Exchange. The firm, which is a major insurance broker in addition to owning Putnam, on Tuesday reported a 19% rise in third-quarter profit to $357 million, or 65 cents a share.

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