Putnam Settles With SEC; Critics Call Deal Too Lenient

Times Staff Writers

Putnam Investment Management on Thursday reached a partial settlement with federal regulators in the mutual fund scandal, agreeing to reforms that potentially provide a blueprint for an industry struggling to restore public confidence.

But the deal with the Securities and Exchange Commission was immediately lambasted by Massachusetts regulators, who said the SEC was letting Boston-based Putnam off easy -- and that the settlement sent the wrong message to other fund companies under investigation. They vowed to continue their own inquiry.

New York Atty. Gen. Eliot Spitzer, who first uncovered abuses in the trading of fund shares, called the agreement between Putnam and the SEC "only a starting point" and said his probe into the company also would continue.

Putnam, which on Oct. 28 became the first fund firm charged in the ever-widening scandal, said it agreed to a number of changes to improve oversight of its operations.

Slammed by big cash withdrawals from angry investors in recent weeks, the fifth-largest fund company pledged to hire an independent compliance consultant and to restrict trading of fund shares by its employees.

As with most SEC settlements, Putnam didn't admit wrongdoing. The firm will still have to pay some financial penalty and restitution, but the amount "remains open and will be determined at a later date," the SEC said.

The agency had charged Putnam with securities fraud for allowing two portfolio managers in recent years to engage in allegedly improper short-term trading of fund shares for their own enrichment and to the potential detriment of other investors in the funds.

The spotlight on questionable mutual-fund trading practices was initially shined by Spitzer, who on Sept. 3 announced a settlement with investment firm Canary Capital Partners for transactions it had made with four fund companies. The fund firms, however, weren't charged.

Since then, the SEC and Massachusetts regulators have launched extensive investigations of their own. These probes have centered on short-term "market timing" trades that allegedly allowed favored investors to skim profits from fund portfolios even as fund companies discouraged most shareholders from such activities.

State and federal regulators say they have uncovered numerous instances of abusive trading of fund shares by investors and by fund insiders. They have pledged to bring cases against more companies.

The mutual fund scandal has struck a national nerve because the $7-trillion industry has long projected an image of being squeaky clean and always putting the average investor's interests first. About 95 million Americans own fund shares.

William Galvin, Massachusetts secretary of the commonwealth and the state's top securities cop, sharply criticized the SEC on Thursday, saying it was too early to enter settlements with fund companies because regulators have just begun to dig into fraud allegations.

"You don't expose wrongdoing by rushing into settlements before you know the extent" of abuses, Galvin said.

He added that Massachusetts, which charged Putnam with fraud in a separate case filed the same day as the SEC's initial complaint, "may well bring more charges" against the company.

Galvin said he was particularly upset that the SEC didn't require Putnam to admit wrongdoing, contending that settling cases in that manner only perpetuates illicit behavior in the securities industry.

"They just figure out new ways to do it again," he said.

Putnam's chief executive, Charles E. Haldeman, said the deal with the SEC would result in "groundbreaking reforms" that would make Putnam "a standard-bearer for professional and ethical conduct in our industry."

Some outsiders praised the accord.

"The compliance and corporate governance reforms are ones I've never seen before in a settlement" of this kind, said Paul S. Stevens, a Washington securities lawyer.

As part of the deal, Putnam is to retain an independent compliance consultant to review its policies. What's more, at least once every two years a third party will conduct a review of the firm's policies and procedures.

The company also will be required to have an independent chairman for each fund board of trustees, meaning they can't be tied to the management company.

Having independent fund chairs is a step that many mutual fund companies have fought in the past, but some key members of Congress have indicated that they favor legislation forcing that reform on the industry. On Thursday, Democratic Sens. Jon Corzine of New Jersey and Christopher J. Dodd of Connecticut said they would introduce a bill requiring independent fund chairmen, in addition to other reforms.

As part of its deal, Putnam's fund boards will have an independent staff member "who will report to and assist the fund boards in monitoring Putnam's compliance" with securities laws, the SEC said.

"I tend to be pretty cynical, but I think this will help," said Henry Hu, corporate and securities law professor at the University of Texas at Austin.

To help stop abusive short-term trading of fund shares by company insiders, Putnam also agreed to require that employees who invest in the company's funds hold their investments for at least 90 days.

Though the SEC settled with the company, the agency said its cases against Omid Kamshad and Justin M. Scott, the two Putnam fund managers charged in the Oct. 28 complaint, were still pending.

Attorneys representing Kamshad and Scott could not be reached for comment.

Stephen M. Cutler, the SEC's director of enforcement, said the fund industry shouldn't consider the Putnam deal a template for other settlements. "It addresses the particular conduct in this case," he said.

Still, many legal experts said it made sense that other fund companies would follow the governance changes the SEC has wrung from Putnam.

"That's the way rational people would look at it," said Alan Bromberg, a securities law professor at Southern Methodist University in Dallas.

Meanwhile, the objections raised by Massachusetts' Galvin on Thursday threatened to deepen the rift between the SEC and state securities regulators. State officials have accused the SEC of being asleep on the job in recent years.

Asked whether the disagreement with Galvin would hurt cooperation between the SEC and the states, Cutler said, "I am always interested in cooperating with fellow regulators."

Some experts disagreed with Galvin's characterization of the SEC as caving in to the fund industry by quickly settling with Putnam.

"For the first time, I really feel quite satisfied with the new direction of the SEC," said Mercer Bullard, law professor at the University of Mississippi. "The SEC is back in the game in a big way."

Indeed, many legal analysts said the SEC's move might be an attempt to take back the lead on the investigation.

Alan Lieberman, a partner at Blank Rome in New York who often represents public companies in SEC enforcement actions, said it made sense for regulators to seek individual fund company settlements rather than a so-called global accord. That's because the allegations vary widely from firm to firm.

"Each fund company has to get its own house in order," Lieberman said.

Shares of Putnam's parent, Marsh & McLennan Cos., fell 13 cents to $45.41 on the New York Stock Exchange.

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