Although Putnam Investments had numerous stopgap measures to prevent market timing, it failed to establish a way to detect it in individual accounts within omnibus brokerage accounts or at the participant level in 401(k) plans. The nations fifth-largest mutual fund company also was aware that two of its chief investment officers were guilty of market timing as long as five years ago yet it did nothing immediately to stop them. Nor did it order them to return the $700,000 in profits they had made.
This was the linchpin of Federal and state regulators securities fraud and civil charges Tuesday against the firm and two of its executives, Omid Kamshad and Justin M. Scott.
"This is about personal deceit, breach of duty, breach of trust and corporate deceit," Massachusetts Secretary of the Commonwealth William Galvin reportedly said at a news conference.
Even when Putnam put policies in place to detect suspected 401(k) market timing by individual participants, the Massachusetts complaint said, the firm still failed to establish remedial action against such violations. In fact, a number of Putnam phone reps had grown so accustomed to active trading by 28 members of the International Brotherhood of Boilermakers union in two international funds in their 401(k), that they referred to the hour between 3 p.m. and 4 p.m. as "Boilermaker Hour." When the reps told management about the rapid trading, they reportedly were told not to worry about it. Further, internal documents show that top management was more concerned about securing the 401(k) business of the Boilermakers, which had $100 million invested with the firm.
One of the so-called market-timing "triggers" that Putnam had in place was any exchange in a fund involving 1% or more of assets within 10 days. But trading by 28 Boilermakers who collectively owned 20% of the assets in two Putnam funds, the Putnam International Voyager and the Putnam International Growth funds, should have tipped the firm off, the complaint said. These 28 union members alone were responsible for 99% of the exchanges in both of those funds.
The suit further alleges that after Galvins office subpoenaed Putnam on Sept. 11, executives of the firm explained that the controlling factor guiding the Boilermakers 401(k) was the plan rules, not the prospectus. The regulators said that was a disingenuous stance, since with at least one other defined contribution plan, Putnam cited fund prospectuses as the dominant rule in order to stop market timing. Furthermore, the regulators said, both federal and state securities laws state that no ancillary document can supercede a funds prospectus, and by allowing select fund managers and investors to market time its funds, Putnam breached its fiduciary responsibility to long-term shareholders.
A Putnam spokeswoman said the firm would issue a formal response by the end of the day Tuesday.