A court date to determine the dollar amount that Putnam must pay is fast approaching, but the two sides appear farther apart than ever, with the SEC looking for disgorgement and fines that could reach at least $800 million.
In a pre-hearing brief, Putnam said the Commission is seeking to possibly implement the largest combination of disgorgement and penalty, calling it an attempt to reach a headlines making number that lacks proportionality to the actual damage done.
While the SECs brief did not indicate an exact dollar amount it is seeking, MME calculations, with the assistance of Lipper of New York, put the basement number at about $830 million.
The SEC said a significant penalty is necessary to serve as a deterrent and to penalize the company, not just put it to where it would have been if it did not commit fraud, noting that Marsh & McLennan, Putnams parent company, had net income of $1.5 billion last year.
The potential price tag can be broken down into two basic categories: the forfeiture of ill-gotten gains and penalties.
By keeping the improper trading activity of its employees a secret from shareholders and its board of trustees for nearly four years, Putnam delayed the eventual investor backlash, the SEC claims. Meanwhile, the firm was collecting management fees on the money that would have walked out the door once the developments were revealed. Regulators are looking for the return of this fee money, plus interest, under the theory that Putnam should not have been allowed to profit from its criminal activity. Additionally, the SEC says Putnam is liable for the disgorgement of profits under the "faithless servant" doctrine.
The SEC evidenced the $54 billion that left Putnam in the fourth quarter as backup for this argument, but noted that not all redemptions were attributable to the scandal some were likely due to poor performance and other factors. The SEC said it would tailor its argument to account for this fact.
According to Lipper, Putnam has bled $31 billion in mutual fund assets since November. Calculating the fee ratio for the funds that suffered outflows at Putnam during that time, and then applying that rate to the $31 billion in assets, Lipper said that according to the basic rationale provided by the SEC, Putnam collected $171.4 million in fees it shouldnt have, on an annualized basis. The SEC is claiming the activity took place over a four-year period, bringing the total to more than $685 million in fees during that time. This calculation does not include interest and does not account for redemptions spurred by poor performance.
As for penalties, the SEC is asking for Putnam to pay either $550,000 or $600,000, depending on the date of the violation, for each of the 251 improper traders Putnam has admitted its employees made over a five-year period. Using the lower figure, the SEC is seeking $138 million in fines for trades Putnam has already admitted to and an unknown amount for the "many more additional improper trades" it intends on proving in court.
Putnams position is that the SECs argument lacks "proportionally" since it claims harm done by the six Putnam employees amounts to only $500,000 in net profits. Additionally, Putnam claims that none of the managers had company permission to engage in improper trading and that the firm has agreed to make full restitution, implement reforms and asserts that the violations in its shop are not on par with timing arrangements set up by other fund firms.
The sides are set to meet April 19 to duke it out in Boston before an administrative law judge. Some are saying the SEC is pushing the envelope too far, while shareholder advocates and critics claim Putnams arguments indicate the firm is reverting to its old way of thinking.
To read a complete version of this story, see the 4/5/04 issue of MME.