Lynch Says Trading Abuse the Exception, Not the Rule

Improper trading of mutual fund shares is the exception rather than the rule, Peter Lynch, vice chairman of Fidelity Management & Research Co., said Tuesday.

Interviewed on CNBC, Lynch -- who became a fund industry star as manager of the Fidelity Magellan stock fund in the 1980s -- said the trading abuses that New York Atty. Gen. Eliot Spitzer alleges occurred at four fund families are “not what happens at Fidelity. That’s not what happens at most companies in the industry.”

Since Spitzer announced his investigation of fund trading Sept. 3, a number of industry executives have attempted to bolster the industry’s image by insisting that the illegal or improper practices weren’t widespread.

But Lynch said that if the allegations were proved, the culprits “should be prosecuted and punished to the fullest.”

Separately on Tuesday, Massachusetts securities regulators said they have issued subpoenas to Putnam Investments, the fifth-largest U.S. fund company, in an investigation of possible favored treatment of clients trading in shares of one of its funds.

The company was responding to the information request, a spokeswoman said.

The investigation centers on rapid-fire trading of shares in Putnam’s International Capital Opportunities Fund, which focuses on small and medium-sized foreign stocks, according to sources familiar with the probe.

A few weeks ago, Massachusetts regulators said they were investigating whether brokers in Prudential Securities’ Boston office were engaging in market-timing fund trades, which may not be illegal but usually are discouraged by fund companies because they can lower portfolio returns for long-term investors.

“This is not a fishing expedition,” said William F. Galvin, Massachusetts’ securities chief.

“We obviously have probable cause of some kind to make these inquiries.”

Putnam said it has been active in trying to limit market-timing trades, by imposing fees on investors who trade too often, among other measures.