Ethics Newsline®

BOSTON
Putnam Investments, the first U.S. firm to settle charges in the roiling mutual-fund scandal still gripping the country, last week took a swing at U.S. regulators, who they accused of trying to gouge the firm with unreasonable penalties.

Putnam has admitted that at least six employees, including four portfolio managers, engaged in at least 251 improper trades, making more than $1 million in profits at the expense of average investors.

Federal authorities have accused Putnam executives, including general counsel William Wolverton, of suppressing knowledge that such trades were ongoing from 1998 until 2003, reported the New York Times.

When the scandal went public, it cost the jobs of Putnam chief executive Lawrence Lasser and of the soon-to-be-replaced Wolverton, who also served as both the compliance officer and code of ethics officer.

It also has cost Putnam an estimated $54 billion in funds yanked by investors angry about the illicit trades, noted the Times.

While Putnam agreed last November to settle federal charges, last week it balked at the SEC’s proposal to fine the firm the equivalent of the fees earned on the $54 billion pulled by investors.

Had Putnam been honest with investors when it learned of the problems in 2000, those funds likely would have been withheld given investors’ current ire, according to the SEC. Any profits, therefore, are unfair and should be forfeited.

Putnam concealed knowledge of wrongdoing “to protect the jobs and reputation of several high-level executives and to avoid the massive loss of clients and their management fees that would — and eventually did — follow,” the SEC said. “By concealing its fraud, Putnam unjustly received massive amounts of management fees during nearly four years in which it continued to operate its business as usual.”

Last week, Putnam denounced that claim, accusing the SEC of “a transparent attempt to find a way to reach a headline-making number.”

“Putnam is prepared to pay a reasonable penalty,” company spokeswoman Nancy Fisher told the Washington Post. “Any such penalty, however, must be proportionate to the conduct at issue.”

A recent investigation by a panel of independent Putnam trustees faulted the company for the problems, but also said the firm “made extensive efforts to identify and deter excessive short-term trading.”