US regulators yesterday pressed fraud charges against Putnam Investments and two of its former portfolio managers for alleged improper mutual fund trading.
Putnam, one of the biggest US mutual fund firms, is the first to be hit with charges amid the widening probe by US regulators into fund management scandals, which is tarnishing the image of the $7,000 billion industry.
The Securities and Exchange Commission and Massachusetts regulators filed civil charges against Putnam for allegedly allowing Mr Justin Scott and Mr Omid Kamshad, two money managers, to reap personal profits by rapidly trading shares in the portfolios they oversaw. The SEC accused the Boston-based firm of committing securities fraud for failing to alert investors and its board about the duo's activities.
In a separate civil action against the two former managing directors, the SEC accused Mr Scott and Mr Kamshad of hurting other fund shareholders through their trading practices.
The SEC said the pair benefited from having "non-public information" about their funds' portfolio holdings, valuations and transactions. However, it stopped short of accusing them of insider trading.
Mr Stephen M Cutler, head of enforcement at the SEC, said: "Self-dealing is antithetical to the responsibilities investment advisers and their employees owe to mutual fund investors."
Both the SEC and Massachusetts regulators accuse Putnam and the two portfolio managers of committing fraud by allowing market-timing trades in contradiction of Putnam's policies, which discouraged them.
The probe into improper trading in mutual fund shares - the biggest scandal to hit the fund industry in more than 60 years - launched by Mr Eliot Spitzer, New York's attorney-general.
Mr William Galvin, secretary of the commonwealth of Massachusetts, said the actions against Putnam "should send a message to everyone in the fund business". The SEC's probe into activities by other money managers at Putnam is continuing.
It seems that many funds have been willing to tolerate or support professional arbitragers siphoning off billions of dollars in short-term profits at the expense of long-term investors.
While "market timing" or rapidly trading shares in mutual funds is not illegal, it is frowned on by regulators because market timers take advantage of the fact that when funds set their prices at 4pm every day, they use closing prices from around the world that can be up to 14 hours old.
Already, more than 80 subpoenas have been issued by Mr Spitzer, more than 40 class-action lawsuits lodged and dozens of employees fired. - (Financial Times Service)
