James E. Putman, the founder and former CEO of an Appleton, Wis., investment firm, was disciplined by the CFP Board for allegedly accepting $1.24 million in kickbacks for steering clients’ money into dubious investments.
The board permanently revoked Putman’s right to use the CFP designation following a civil suit brought three years ago by the SEC alleging security fraud violations and seeking to freeze assets in the case. Putman’s firm, Wealth Management, managed unregistered funds while continuing to cause clients to invest in those funds, according to the SEC. Putman did not return calls to his home.
In April, a Wisconsin federal court awarded summary judgment to the commission on its claims against Putman, ordering him to pay nearly $1.7 million, including a civil penalty of $130,000.
At the height of his practice, according to a decision in the case filed in U.S. District Court for the Eastern District of Wisconsin, Putman’s firm had 447 clients and approximately $131 million under management. Many of the retirees were clients seeking safe investments in stocks, bonds and highly liquid stock and bond funds, the decision says.
“In 2003, however, Wealth Management altered this model by establishing six unregistered investment pools that were similar to hedge funds,” according to the decision. “Of the roughly $131 million under management in 2009, about $102 million was invested in these six funds.” The lion’s share, approximately $88 million, allegedly went into two funds alone, the decision says.
“The offering documents for [the two funds] represented that these funds would invest primarily in ‘investment grade’ debt securities,” according to the decision. “This made sense given Wealth Management’s client base—retirees who depended on their Wealth Management assets as a primary source of income and therefore required safe, low-risk investments. But this representation was far from the truth. Although Putman … told clients that the funds were safe and profitable, they were actually investing client assets in risky and illiquid investments — primarily subfunds and other alternative investments such as life-insurance-premium financing funds, real estate financing funds, and a water park.”
During this time, Wealth Management sent out reports to clients stating that their stable and conservative investments were high performing and exceeding industry benchmarks, the decision says.
“The illusion ended in February 2008 when Wealth Management sent a letter to … investors [in one fund] saying that there was not enough money to pay redemptions in full and that redemptions would be limited to 2% per quarter of the value of each individual’s investment,” the decision continues. “At this point things began to unravel. In June 2008 Putman … informed Wealth Management’s board that they had received kickbacks for steering assets to a life insurance financing fund, and investors learned that the SEC was investigating Wealth Management’s investment practices.”
As a result, according to the decision, a rash of employee resignations followed, and Wealth Management told investors it would no longer accept redemptions and would liquidate the funds.
Ultimately, the court granted SEC motions to appoint a receiver for the firm and funds. The receiver’s accounting revealed that the funds had only $6.3 million in recoverable assets to distribute, so most investors stood to recover only pennies on the dollar.