William Galvin makes no apologies for his outspoken nature or his insistence on twisting the arm of Putnam Investments until the firm cried "uncle."
He has been dubbed the Prince of Darkness by his adversaries and has been accused of grandstanding to fulfill political ambitions, but the Secretary of the Commonwealth of Massachusetts says he is simply doing his job.
"Whenever you are in an enforcement mode, you have to be willing to make the charges, make them stick, do the investigations, and you can't blink," Galvin said. "You have to do your job. Sometimes the accusation is that you just do things for political attention. The alternative would be not doing anything, [which] doesn't make much sense."
His role as secretary is an oddity, a hybrid position charged with overseeing business regulations and elections. Because of a quirk in the state constitution, securities law enforcement falls to Galvin, and not the attorney general's office.
Galvin currently has active cases open against Franklin Resources, for timing arrangements struck with Las Vegas investor Daniel Calugar, which he has called "basically a legal bribe," and Prudential. He has met with both firms, but he wouldn't characterize the talks as negotiations yet.
While Galvin is well known in New England political circles, the Putnam bombshell and the subsequent smattering of tongue-lashings he has given in the press has put him on the national stage.
Putnam Problem
The conservative Democrat, who has been on Beacon Hill since the 1970's and in his current role since 1994, made waves last year when he broke open the Putnam market-timing case, started by tipster Peter Scannell, who was turned away by the SEC's Boston office.
Galvin refused to go along with an SEC settlement in November, saying an the time that he was outraged at the federal agency. "There is a lack of vigorous enforcement, and this merry-go-round is costly to investors," he said back then. "The SEC should expose wrongdoing. Putnam has not come clean. The SEC's enforcement is obviously totally ineffective."
At issue was language included in the agreement with the SEC, which is commonplace in settlements with regulators, where Putnam did not admit wrongdoing.
Galvin, who once called a bald political opponent "Senator Yoda," is now using the full force of his position. He stood his ground and eventually persuaded Putnam to admit wrongdoing in its $55 million settlement with his office, announced on the same day as an additional $55 million agreement with the SEC.
Galvin said non-admission reflects an "unfortunate attitude" prevalent with securities laws violations that the infractions are just business transactions and don't have any real victims. By demanding an admission, Galvin said he is trying to break a pattern among regulators, including his office in the past, of accepting the "neither admit nor deny" language, which he believes is the root cause of some of the recidivist problems in the fund universe.
"There has been this willingness to allow these firms, once it has been established they have engaged in wrongdoing, to pay a fine, to not admit they did anything wrong and to say they'll never do it again. But then, they find a more clever way to do it again. If we're going to end the merry-go-round of accusation and non-admission, I think you have to at some point say if a firm has done something wrong, there needs to be an acknowledgement that it was wrong."
Putnam's woes could continue to grow, however, as a result of its settlement with Galvin's office. The admission of guilt may help investors involved in class-action lawsuits receive punitive damages, something Galvin said was not a motive of his, nor is his problem.
"Those are the consequences that flow from wrongdoing," Galvin said. "Class-action suits go on anyway, and even in the case of admissions, the companies have attempted to tailor the admissions in such a way as to insulate them from a summary judgment in some of these cases."
Galvin's office now has a second probe into whether the firm gave rebates, or what Galvin dubs "payola" to preferred 401(k) clients.
Unlike his counterpart in New York, Attorney General Eliot Spitzer, or federal regulators at the SEC, Galvin has some serious disadvantages, forcing the second-longest-serving statewide officer for Massachusetts to pick and choose his cases carefully. His securities division had 29 staffers and a $2 million budget last year. In fact, during the division's investigation into tainted research at Credit Suisse First Boston during the Wall Street research scandal, Matt Nestor, the division's director, had to hire law students to sift through the 500,000 e-mails that the office had collected.
Galvin, who had a failed gubernatorial bid in 2002, has brought a previous action against Morgan Stanley for sales practices and will continue to look at other fund firms for 12b-1 issues and directed-brokerage violations. He has subpoenaed several firms including Fidelity Investments, but said he has to be careful with his resources.
As for now, Galvin indicated there has not been any wrongdoing uncovered at Fidelity. "We generally bring actions pretty promptly, and we haven't brought any here. Because of the amount of money that you are dealing with and the nature of the cases, mainly the recordkeeping that has to be maintained, it is pretty obvious once you get the records if there is an issue or there isn't."
Since the scandal broke, a number of firms have settled, including Janus, Alliance, Bank of America, Columbia and MFS. However, Putnam has been the only firm Galvin has settled with, and he is content to let other regulators lead the way in these other cases.
Galvin said his office is satisfied with the existing settlements thus far and is not planning on piggybacking his state's own settlement on top of already-agreed upon ones mentioned above. However, in the future, he would consider including fee reductions in any settlement.
"From our point of view, in some cases we've been participants in that we've had information that we've passed along to other regulators. MFS was an example where we worked with our colleagues in New Hampshire and, of course, the SEC. Some of these other matters were initiated by the SEC or by other regulators, and we wouldn't have any reason to second guess them or to pursue any individual claims. For the most part, the cases we have brought have had roots here in Massachusetts. We're quite content if other regulators want to pursue these matters, to let them do so."
Shelby Stalling
Galvin said "statutory action in Congress" is needed to help cure what ails the fund industry. However, Congress has reportedly agreed, at least for now, to defer to the SEC, despite the passage of a reform bill in the House and a highly publicized proposal championed by Sen. Fitzgerald in the Senate.
The Mutual Fund Integrity and Fee Transparency Act of 2003, sponsored by Rep. Richard Baker (R-La.), was approved by a landslide vote in the House. However, the Senate may prove to be the higher hurdle in this race. "I know Senator Shelby has been less excited about the bill in the Senate," Galvin said. So much so that it is stalled on the Senate floor for the time being.
The entire way regulators view and treat the fund industry also needs to be reformed, according to Galvin. Regulators treat fund shops like "small little businesses where the directors just sit around a table and decide what they are going to do with the money," he said. "I don't think regulation in the mutual fund area has kept pace with the role that mutual funds now play in our financial savings system." Things have to change, and safeguards and protections need to be in place for the average investor.
Galvin also claims that despite all the negative publicity surrounding the industry and the magnified focus on fiduciary responsibilities, some firms are simply trying to insulate themselves from legal liability while continuing to allow practices that harm average investors.
"I am disturbed to see so many funds that have simply amended their prospectus to try and now legalize market timing," Galvin said. "That does not indicate, to me, good faith on their part. I'm also concerned about the role of hedge funds."
Specifically, Galvin said the side-by-side management of hedge funds and mutual funds needs to be nixed. "I personally don't think hedge funds and mutual funds ought to be housed in the same firms. It seems to me there is a conflict there in philosophy, and the potential for mutual funds to be victimized by hedge funds is very great," he said.
The term hedge fund has found its way into the mainstream, and many average investors thinks the investment strategy is a panacea for their problems, much like day trading was a few years ago, Galvin said.
As for the extent of the fund scandal, Galvin said he didn't want to hurt the industry, but added he cannot fret about the fallout from bringing down some of the biggest Boston fund firms. "If there are short-term negative effects on any particular fund or individual, the long-term benefit to the industry is more important to those that are employed by it," he said.
When there is an obvious failure, such as the skimming that went on in the market-timing schemes, there has to be some action, he said. "You can just simply look the other way. If I were in charge of regulating the cleanliness or healthiness of food commodities or regulating supermarkets and somebody was accused of selling rancid food, I don't think too many people would say, Please don't investigate them. You may cost some sales clerks or baggers jobs.' I think people would say, Do your job,' and that's what we're doing."
Copyright 2004 Thomson Media Inc. All Rights Reserved.
http://www.thomsonmedia.com http://www.mmexecutive.com
