Putnam Advisory, a unit of Boston-based Putnam Investments, was charged yesterday by Massachusetts state regulators with deceiving investors who purchased about $3 billion in mortgage-related securities created and sold by Putnam several years ago.

In the 66-page complaint against Putnam Advisory, Massachusetts Secretary of the Commonwealth William Galvin outlined how the firm allowed Magnetar Capital, a well-known Illinois hedge fund, to aid in the selection process for securities to be packaged up as collateralized debt obligations that Putnam was creating and selling. Investors paid about $3 billion for the two CDOs—Pyxis 2006 and Pyxis 2007—before the securities went bust during the financial crisis.

But not everybody lost money, the complaint noted. Mostly because of bets against the Putnam CDOs, Magnetar reaped more than $67 million when those securities—most of which were bundled subprime mortgages—went south.

Putnam never revealed to buyers of the CDOs that Magnetar had helped select the securities within the CDOs nor that Magnetar was betting the CDOs would fail, the complaint states. Massachusetts regulators are seeking the disgorgement of all fees gained from the deals in question and unspecified fines.

Putnam Advisory, which reportedly earned $8.8 million in fees for managing the CDOs, issued a statement responding to the charges, saying: “The Putnam Advisory Company vehemently denies the allegations in the administrative action filed today by the Massachusetts Securities Division and will fight them vigorously.” Laura McNamara, a Putnam spokesperson, declined further comment beyond what was in the statement.

Interestingly, the state complaint also alleged that the person who disclosed the relationship between Magnetar and Putnam was a former Putnam employee who was fired in 2003 for playing a role in an earlier scandal involving market-timing. Putnam had previously settled with Massachusetts securities regulators over that employee’s market-timing activities.

Putnam Advisory isn’t the first financial firm targeted by Massachusetts securities regulators for its dealings with Magnetar. In February, state regulators settled with State Street Global Advisors for $5 million for its involvement in a $1.56 billion CDO also allegedly stuffed with subprime securities chosen by Magnetar. And last year, JPMorgan Securities agreed to pay $153.6 million to settle fraud charges with the Securities and Exchange Commission that it had allowed Magnetar input on what went into its CDOs. JPMorgan did not admit or deny the SEC’s allegations.

Magnetar, which was not charged in the Massachusetts’ complaint against Putnam Advisory, has vigorously denied helping banks select securities in their CDOs and then betting against them.

Putnam Advisory is the asset management unit of Putnam Investments, a mutual fund company with $127 billion assets under management as of the end of September. Putnam Investments is owned by Montreal-based Power Corp.

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