However, the commission ultimately decided not to file similar charges against PFTC, going to extensive lengths in the SEC’s announcement about the commission’s action to explain why.
Putnam escaped charges filed against the corporation because “of its swift, extensive and extraordinary cooperation in the Commission’s investigation of the transactions that are the subject of the Commission’s complaint.”
PFTC’s actions included, according to the federal regulators:
- prompt self-reporting
- an independent internal investigation
- sharing the results of that investigation with the government
- terminating and otherwise disciplining responsible wrongdoers
- providing full restitution to its defrauded clients
- paying for the attorneys’ and consultants’ fees of its defrauded clients
- implementing new controls designed to prevent the recurrence of fraudulent conduct.
“We hope the commission’s actions here will encourage those who become aware of wrongdoing to do the right thing – stop the wrongful conduct, promptly report it to the commission staff, and cooperate fully in any subsequent investigation of the conduct, ” said Walter Ricciardi, deputy director of the Division of Enforcement and District Administrator of the commission’s Boston district office in SEC announcement.
“The SEC has decided to take no action against Putnam in connection with the former employees’ unacceptable conduct because of our swift, extensive, and extraordinary cooperation,” said Ed Haldeman, president and CEO of Putnam Investments, in a company statement. “The decisive actions that our new management team took after discovering this issue demonstrate how seriously we take such matters.”
Meanwhile, the defendants named in the SEC action included:
- Karnig Durgarian, a former senior managing director and chief of operations for PFTC, as well as principal executive officer of certain Putnam mutual funds from 2002 through 2004
- Donald McCracken, a former managing director and head of global operations services for PFTC
- Virginia Papa, a former managing director and director of defined contribution servicing
- Sandra Childs, a former managing director who had overall responsibility for PFTC's compliance department
- Kevin Crain, a managing director who had responsibility for PFTC's plan administration unit
- Ronald Hogan, a former vice-president who had responsibility for new business implementation at PFTC.
The commission's complaint , filed on December 30, 2005 in US District Court in Boston, alleges that the defendants' misconduct arose out of PFTC's one-day delay in investing certain assets of a defined contribution client, Cardinal Health, Inc., in January 2001 (See Putnam: Employees Ran Afoul of Plan Expense Policies ).
The markets rose steeply on the missed day, causing Cardinal Health's defined contribution plan to miss out on nearly $4 million of market gains.
According to the complaint, rather than inform Cardinal Health of the one-day delay or compensate their client for the missed trading gain, the defendants decided to improperly shift approximately $3 million of the costs of the delay to shareholders of certain Putnam mutual funds through deception, illegal trade reversals, and accounting machinations.
The complaint also alleges that the defendants improperly allowed Cardinal Health's defined contribution plan to bear approximately $1 million of the loss without disclosing to Cardinal Heath that they had done so. The complaint further alleges that Durgarian, Papa, Childs, and Crain also took steps to cover-up the wrongful conduct.
"We have worked hard at Putnam to create a culture in which all of our colleagues value the importance of taking care of other people's money and putting our clients first," Haldeman asserted. "We believe that the steps we took after discovering this issue are proof of the strength of that culture, and we are firmly committed to these fiduciary principles."
Putnam was an early key player in the state/federal fund industry probe, which has focused on market timing, late trading, and certain sales practices.