Trading Probes Muscle Out Strong, Putnam Chiefs

The move by Strong comes in the wake of New York Attorney General Eliot Spitzer’s vow to bring charges against him for improper trading. However, stepping down from the top spot of the mutual fund company will have no affect on his position at the parent company, Strong Capital Management, where Strong said he would remain chairman and chief executive, according to a Reuters report.

Strong’s move comes after it was reported last week that Spitzer was looking into allegations that Strong routinely used his Menominee Falls, Wisconsin-based fund company to personally profit at the expense of his investors. To support this contention, trading records subpoenaed by Spitzer’s office show a five-year period ending in 2002 suggesting that Strong made at least $600,000 for himself and friends and family by engaging in rapid, market-timed trading (See Spitzer Looking at “Strong” Arming Mutual Fund Head ).

Even though market timing – the rapid trading in and out of mutual funds to take advantage of inefficiencies in the market – is not illegal, per se, it is generally frowned upon across the industry. In fact, Strong and most other funds say in their prospectuses they discourage this activity because it allows timers to make money while diluting the value of long-term investors’ shares.

Joining Spitzer in examining the trading practices is the US Securities and Exchange Commission (SEC), which launched a similar investigation. Further, three states with college savings plans managed by Strong Capital said they would convene emergency meetings to discuss the charges against the privately held company (See Oregon College Savings Could See “Strong” OutflowWisconsin Weighing Strong, EdVest Relationship ).

Putnam Moves

Also feeling the heat from increased scrutiny into market-timing practices at his firm is the now ex-Chief Executive Officer at Putnam Investments Lasser. Marsh & McLennan Cos., the parent company of the nation’s fifth largest mutual fund company, announced replacement plans for Lasser on Monday. Similar to the Strong situation, the move would come less than a week after state and federal regulators filed civil fraud charges against Putnam, claiming it allowed improper trading of its funds (SeeMarket Timing Leads to “Late” Departure of Putnam Fund Managers ).

Filing in for Lasser at the top will be Charles “Ed” Halderman, who was named president and chief executive officer after serving as senior managing director and co-head of Investments at Putnam. However, even with the promotion, Halderman will continue his investment responsibilities, according to a news release.

Other appointments made by Marsh & McLennan include:

• Steven Spiegel, senior managing director and chief of Global Distribution, has been appointed Putnam’s vice chairman –a new position.
• A.J.C. “Ian” Smith, former chairman and chief executive officer of Marsh & McLennan, has been named to the new post of chairman of Putnam.
• Barry Barbash, a partner in Shearman & Sterling LLP and former director of the SEC’s Division of Investment Management, has been engaged by Marsh & McLennan to conduct an independent review of Putnam’s policies and controls.

“[Marsh & McLennan] and Putnam are committed to seeing that the interests of Putnam’s clients and investors are well served,” Marsh & McLennan head Jeffrey Greenberg said in the announcement. “We are taking actions today to address the issues that are confronting Putnam. The kind of conduct that occurred has no place at Putnam. We are taking measures to see that this does not happen again. We have previously stated that Putnam will make complete restitution to the Putnam funds for any losses suffered by Putnam shareholders as a result of any improper market-timing activities. We deeply regret that such conduct occurred and apologize to Putnam shareholders,” he added.

Lasser, who has been a director of Marsh & McLennan since 1987 and served as Putnam’s chief since 1986 will leave the company. “We thank Larry for his contributions to Putnam’s growth during his 33 years at the firm,” Greenberg said in the release. “During his tenure, Putnam has grown to become one of the nation’s leading investment management companies.”