Putnam Investments took the initial hit from the rash of sales and marketing executives defecting to Liberty Financial in the late 1990s, but it is Columbia, which since consumed Liberty, that is now poised to take a beating from the transaction.

Regulators have filed charges against Columbia that could result in the firm being barred from managing its own mutual funds. Reportedly in the thick of the alleged wrongdoing are the two former co-presidents of its distribution unit, both of whom hail from Putnam.

So far, regulators have filed charges, which include accepting $2.5 billion worth of timing business contrary to prospectus language, against the firm. The complaints cite individuals by title and do not name or charge them. However, there is a good chance regulators may still bring charges against individuals in the case in the near future, sources said.

Columbia has suspended eight of its employees (see MME 3/1/04), among them James Tambone and Louis Tasiopoulos, co-presidents of Columbia Funds Distributor. The "president" of Columbia Distributor was made aware of damage being done to the fund by the market-timing activity, yet continued to allow the arrangements, according to the Securities and Exchange Commission and New York Attorney General Eliot Spitzer's complaints.

The Putnam Connection

It is not the first time Tambone and Tasiopoulos have been at the center of a controversy. In a drawn-out lawsuit, Putnam sued Stephen Gibson, its onetime retail marketing director, managing director and head of corporate development, who jumped ship to join Liberty in June 1996. Gibson was promoted from EVP of marketing and business development at its Colonial unit to the role of president and CEO in December.

In January 1997, both Tambone, who had been managing director of Putnam's financial advisers unit, and Tasiopoulos, managing director of financial institutions, broke ranks and joined Gibson at Liberty. Putnam struck back with a lawsuit in Massachusetts State Supreme Court claiming the trio had violated non-solicitation clauses. Both sides settled the case without admitting liability. Notably, another former Putnam exec, Joseph Palombo, is among the eight suspended from Columbia, according to a source. Palombo, the chief operating officer of Columbia Management Group, joined Liberty in 1999 from Putnam, where he had been serving as the firm's COO and compliance chief of its retail fund business.

During the same year as the settlement between the Bostonian neighbors, 1998, Columbia Distributor's problems began, according to regulators. That year, management allegedly started entering into a series of market-timing arrangements with at least nine investment advisers, hedge funds, brokers and individual investors.

An attorney for the defendants did not return phone calls, and Tambone's attorney did not respond to repeated requests for comment.

Robert Powell, an industry consultant based in Salem, Mass., and founding editor of this newsletter, said that Tambone and Tasiopoulos helped transform Liberty's corporate culture, increasing the sales focus. Powell noted that T&T used their abilities and skills to create any competitive advantage they could.

The firm was facing an uphill battle in this area, as Putnam was a powerhouse and Liberty was only able to grow its assets under management by 7.3%, and its mutual fund assets by 4.3% in 1997. In the context of a market that was surging multiples of that rate, Liberty's growth can be described, at best, as sluggish.

However, Putnam's shop was "very potent" at that time, noted a former Putnam employee, who requested his name not be used. As an aggressive marketer with a high emphasis placed on sales, management treated the marketing and sales staff at Putnam better than the investment management professionals, he said. Tambone and Tasiopoulos were well regarded by Putnam management, he said, a sentiment echoed by several sources and illustrated by the fact that Putnam sued Liberty for poaching employees.

The pair probably felt pressure to perform at Liberty as they were brought in from Putnam, a "very marketing-aggressive-oriented shop," the source said. Most likely, they had high expectations attached to their arrival. Others agreed that pressure and high expectations might have led management at Liberty, including T&T, to enter into deals they might not otherwise have.

Whether the result of individual actions or not, sources said, the aggressive corporate culture of Putnam in the late 1990s whereby assets under management were emphasized at the expense of what was best for investors, appears to have infected Liberty around the same time Tambone and Tasiopoulos arrived.

T&T were very strong and aggressive sales executives, driven by growing assets, one source said. The pair was not unethical; the two just were not concerned with ethics, the source said.

Rochelle Lamm, chairman and CEO of Precision Marketing Partners and The Academy of Financial Services Studies in Milwaukee, said that a lot of the problems in the fund industry today are a product of management's failure to look behind the numbers and truly think long term. Sales executives who rise to take on responsibilities outside their day-to-day numbers-oriented realm often lack a whole host of skills they need in management ranks, Lamm said, particularly pursuing long-term benefits to the organization.

Others were not so gentle. "In a few short years, these two co-presidents all but destroyed a perfectly fine investment firm," according to a former Liberty Financial executive, who requested to remain anonymous. "Colonial Investments had been regarded as a premier service provider and a trustworthy, albeit conservative, investment manager. These people and their friends came in and systematically negated all that was good about Colonial, and all the potential that was Liberty Financial.

"They were brought in on the theory that they could ramp up product distribution, principally in Colonial's managed advisory channel business," the former Liberty exec said. "But Liberty's real problem was not a lack of distribution, but a lack of product, a lack of strategic vision and on the distribution side, an almost pathological aversion to decision making. Hiring them away from Putnam was a Hail Mary pass. This could have gone two ways: a touchdown or a fumble. Assuming the SEC civil fraud charges turn out to be true, we now know how it turned out."

The former Liberty executive also said that in addition to altering the business approach of the firm, the new executives, with their sales-focused vision, helped to leave their own mark on the corporate culture. "Among the first actions they took when they arrived, was to order the removal of the Colonial logos from the walls of the reception areas - the wallpaper was ripped right through to the sheetrock. Metal bolts were left sticking out of the wall," he said. "These were unmistakable signals to members of the staff that they were, essentially, yesterday's game."

Responding to questions about the potential souring of the corporate culture, Charles G. Slamans, a Columbia spokesman, said: "We have always strived to set a standard of the highest levels of integrity. It's a standard that places the interest of shareholders ahead of any sales goal. We are cooperating with the regulators and redoubling our efforts to ensure that we fully adhere to policies and procedures in the best interest of shareholders and clients."

FleetBoston acquired the asset management business of Liberty in 2001 and made it part of the Columbia Management Group, so some of the alleged activity detailed in the regulators' complaints did not take place on FleetBoston's watch.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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