Putnam Investments’ lawyer and a former chief executive knew about improper trading at the mutual fund firm several years ago but failed to stop it or inform the board, suggest a report released last week by Putnam’s board of trustees. The report also says that dozens of company employees engaged in improper trading, chairman of the board of trustees, John Hill, told Reuters.
“There were three officials at Putnam who had knowledge of the market timing activities of the Putnam employees in 2000 and 2001 who we felt were in a position of responsibility that they should have informed the board,” Hill said. He identified the three as former CEO Lawrence Lasser, former chief investment strategist Tim Ferguson, and general counsel William Woolverton, the only one still at Putnam. However, Woolverton will soon lose his job when CEO Charles Haldeman picks a new chief counsel from a short list of candidates who have already spoken to the board.
Putnam, the sixth largest US mutual fund company, was the first to be charged with securities fraud when regulators began probing the $7.5 trillion industry. In the report, the trustees say they found no evidence that Putnam executives entered into agreements to permit or facilitate late trading, which is illegal, and no evidence of arrangements to accommodate market timing or excess short-term trading. Still, about 40 employees engaged in market timing, Hill said, speaking about the report. Recently Putnam fired 15 employees, including six fund managers who were market timing in the funds they were managing. Hill said Putnam will pay restitution to investors who were hurt by the practice and said it would cost Putnam at least $7 million.
Soon after Putnam was sued, its corporate parent, Marsh & McLennan, ousted Lasser. However, angry investors pulled out more than $50 billion in assets as the scandal unfolded at the end of 2003. Redemptions have slowed since late last year — Putnam managed roughly $233 billion at the end of February — and the report may offer investors peace of mind that the scandal is over. “The problem at Putnam was in 2000 and 2001. It has been identified. The people who did wrong have been terminated. It is in the past. There is a new management team that is running in the right direction,” Hill said. Industry analysts agreed and gave the board high marks for taking a close look at Putnam’s activities. “The board is conducting a thorough investigation. The members are doing their job and want to get to the bottom of what happened. That is comforting,” said Laura Lutton, analyst at Morningstar Inc. Putnam spokeswoman Nancy Fischer said the report is consistent with the company’s findings about trading issues. “Putnam has taken a number of decisive actions to establish the most rigorous governance, oversight, trading and compliance standards in the mutual fund industry,” she said