Putnam Peppered With Investor Lawsuits

October 24, 2003 (PLANSPONSOR.com) - Two more lawsuits have been confirmed and one may be on the way in the Putnam Investments market timing imbroglio.

The investor lawsuits contend the nation’s fifth-largest mutual fund group gave preferential treatment to certain clients to conduct improper trades. “The basis of suit will deal with the fact that the company treats individual investors differently from institutional ones to the detriment of the individual investor,” says Thomas Dubbs, a partner at Goodkind, Labaton, the law firm planning on filing a lawsuit soon, according to a Reuters report.

Further, the suits – filed by Milberg Weiss, Schiffrin & Barroway, and Cauley Geller – only add to the pressure building on Putnam after allegations surfaced surrounding market timing, which involves rapidly trading in and out of mutual funds to take advantage of inefficiencies in the market, in participant retirement accounts.   Earlier this week, Putnam said it had caught clients buying and selling shares in its mutual funds at a rapid pace through their 401(k) retirement plans a few years ago. Then yesterday, Putnam said six of the company’s money managers had also been caught profiting from so-called market timing, a policy that Putnam publicly says it prohibits.

All of this could lead William Galvin, the Massachusetts Secretary of State, to charge Putnam with two counts of civil securities fraud within the next few days (See Union K Plan Trading Activity Leads to Putnam Fund Probe ).   One count would be filed for the market timing issues while a second would allege that Putnam failed to treat shareholders equally by allowing some to market-time their accounts and not others.   Galvin also plans on charging the six Putnam executives with fraud as well   (See  Market Timing Leads to “Late” Departure of Putnam Fund Managers ).   Additionally, Putnam disclosed it also is being investigated by the Securities and Exchange Commission (SEC) for rapid-fire trading in its funds.

Trading Off

The initial case centered around allegations that arose out of a probe into the mutual fund company’s administration of investment funds for three union 401(k) plans.   Galvin said his investigation has determined that some Putnam investors traded large sums through their retirement accounts so frequently that the aggregate value of their activities reached in the “hundreds of millions of dollars.” The amounts were so large that Galvin said buy-and-hold investors in the funds were hurt because such frequent trading raises expenses for all fund holders, according to a Boston Globe report.

Galvin’s office said one Putnam investor, whom it would not identify, had over a two-year period made more than 400 trades in the firm’s International Voyager fund, moving an aggregate of $338 million in and out of the fund.   “It’s not an isolated incident,” Galvin told the Globe. “The amount of money is significant; the number of trades are significant.”

Putnam’s Stance

This runs contrary to Putnam’s stance that it moved to stop such trading whenever it was discovered and that its investigation reviewed the accounts of “millions” of individual investors.  In the end, “the number of individuals who attempted to market time Putnam funds was minimal during that period of time, and Putnam achieved a success rate of 99.98% in preventing market-timing activity,” the mutual fund company said.

However, the company did admit that it “faced certain difficulties curbing excessive trading” by members of the one of the union plans. One problem, Putnam officials said, is that a mutual fund company has little direct control over the individual investors in a company-sponsored or union-sponsored retirement plan, since its contract is with the plan sponsor.

Additionally, Putnam officials said that representatives of the particular union told them they, too, were powerless to stop the trading because the individual investors are union members, rather than employees over whom they would have more control. In September, after more than two years of fruitless negotiation, Putnam said, it shut off access to two international mutual funds to all members of the local, or about 1,000 investors.