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Putnam Charged in Scandal

Civil complaints allege the fund giant allowed improper trading by two employees.

October 29, 2003|Walter Hamilton | Times Staff Writer

The scandal roiling the mutual fund industry widened Tuesday when state and federal regulators lodged civil securities-fraud charges against Putnam Investments and two of its portfolio managers.

The complaints filed by the Securities and Exchange Commission and the state of Massachusetts marked the first time a fund company has been charged in the trading scandal, which still is unfolding almost two months after it was revealed by New York Atty. Gen. Eliot Spitzer.

The twin complaints portray Boston-based Putnam, the country's fifth-largest fund company, as being well aware of so-called market-timing trades by the two managers and by shareholders in a retirement fund of a New York local of the Boilermakers Union.

The complaints say Putnam took little to no action despite the financial harm that the practice inflicts upon other shareholders.

Market timing was so common at the retirement fund that the hour just before the stock market closed each day, when union members called in their trades, was known in one Putnam branch office as "boilermaker hour," the complaints say.

One union member earned $1 million through timing over a three-year period, regulators allege. More than two dozen others earned $100,000 to $1 million.

The fact that the alleged wrongdoing occurred at a pillar of the fund world raises the specter that improper fund trading is rampant in the $7-trillion industry.

"This is an industry that spends a lot of time trying to market its trustworthiness," said William Galvin, the Massachusetts secretary of the commonwealth. "That makes these actions all the more grievous."

Regulators are seeking unspecified civil penalties against Putnam and the two managers and the return of ill-gotten profits.

Putnam said in a statement that it did not commit fraud and would reimburse its funds for timing-related losses.

The statement said that Putnam monitored almost 2,000 retirement plans for evidence of market timing and that a "small number" of those plans "resisted our efforts to curb their [timing] activity."

"Putnam has a tradition of adhering to high ethical standards, and we remain committed to meeting those standards," the company said. "Unfortunately, our systems and controls were not perfect. We wish they had been."

According to the complaints, the two Putnam money managers -- Omid Kamshad, 41, chief investment officer of Putnam's international "core" equities group, and Justin M. Scott, 46, chief investment officer for international equities -- engaged in repeated timing of funds that they oversaw.

Fund timers seek to profit from rapid-fire trading of funds just as day traders do with frenetic swapping of stocks.

Fund timing often involves the purchase of an international-stock mutual fund late on a day that the U.S. stock market is rising. The investor hopes that foreign markets will jump in tandem, pushing up the value of the international fund and turning out a quick profit.

Market timing hurts a fund's return by skimming profit that otherwise would go to long-term investors.

Timing is not illegal, but fund companies tell investors that they discourage the practice. Therefore, a company that lets select investors time funds could be violating the law.

The managers, who had access to nonpublic information such as what stocks their funds owned, committed fraud by trading for personal gain to the detriment of the funds they managed, regulators allege.

Between 1998 and 2003, Kamshad did at least 38 "round trip" trades of Putnam funds, including four funds that he helped manage, according to the SEC. A round trip is a purchase followed by a sale shortly thereafter.

Putnam discovered in early 2000 that Kamshad was timing funds, but the company neither disciplined him nor required him to reimburse the funds, according to the regulators.

Though Kamshad promised to cease his trading, the complaints allege, the activity continued until this year.

Putnam "turned a blind eye and failed to take any remedial action," the Massachusetts complaint says. "Remarkably, the fund managers were allowed to retain personal profits already gained and were permitted to continue to manage the funds."

Scott made about 35 round-trip trades between 1998 and 2000, the SEC said. Each man earned hundreds of thousands of dollars in profits, the SEC said.

Both managers have been placed on leave, the firm said, and they will be leaving the firm.

"We will defend against this action vigorously," said Kamshad's attorney, John Gilmore. "The trades in question were not a violation of any rules, regulations or statutes."

A lawyer for Scott could not be reached. Calls to the boilermakers local were not returned.

Times staff writer Josh Friedman contributed to this report.

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