Union K Plan Trading Activity Leads to Putnam Fund Probe

October 21, 2003 (PLANSPONSOR.com) - Alleged market timing and late trading within its 401(k) client base may land Putnam Investments on the defendant side of a Massachusetts Secretary of State civil securities fraud suit.

William Galvin, the Secretary of State, plans to charge Putnam with two counts of   civil securities fraud within the next few days, say two unnamed sources involved in the investigation.   One count would allege the company let individuals trade rapidly in and out of their mutual fund accounts – despite company policies that prohibit excessive trading. A second would allege that Putnam failed to treat shareholders equally, by allowing some to market-time their accounts, and not others, according to a Boston Globe report.

Massachusetts is looking into allegations surrounding market timing and late trading activity in and out of Putnam mutual funds that arose out of a probe into the nation’s sixth largest mutual fund company’s ad ministration of investment funds for the:

  • Boilermakers Union, Local Number 5, in New York
  • Joint Industry Board of Electrical Industry, which manages some benefits for union electricians in New York
  • Fluor Hanford Inc., a unit of the California engineering and construction firm Fluor Corp. that runs the retirement plan for more than 11,000 employees from about 10 companies working on the cleanup of the polluted US nuclear reservation in Washington state.

Specifically, the Bay State asked that Putnam produce account records of 11 individual investors, even though the state did not identify the plans those 11 participated in.

The state contends that Putnam participated in market timing activities within these accounts that allowed certain mutual fund holders to trade frequently, while refusing to let others do the same.   Even though market timing is not technically illegal, Putnam, like many other many mutual fund companies, said it strongly discourages such frequent trading because it raises expenses and lowers investment returns for all shareholders.  

It is to this point that the state is expected to allege that by not upholding its policies, Putnam in effect said one thing and did another as well as treated its customers unequally. The state is expected to argue that both would constitute civil fraud in Massachusetts.

Putnam’s Response

For its part, the Boston-based mutual fund company denies any wrongdoing in its 401(k) client base, saying, “any accusation of improper behavior related to market timing within our 401(k) client base is simply not true” in a statement.

Rather, Putnam said 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.

As further evidence to its due diligence, Putnam went on to state that it “worked closely” with Fluor, as well as with the electricians unions, “to identify and eliminate market timing when we detected it,” by adding trading restrictions to the members’ accounts.   The company said that market timing by members of the Fluor retirement plan stopped in August 2002, while market timing by union electricians was thwarted in April 2000.

Backing up this contention was a spokesman for Fluor who said that members of its retirement plan had been frequently trading in their Putnam accounts, but that the company put a stop to it last year.   “There were some changes made. People can’t trade on a daily basis or can’t make transactions on a daily basis. There had been some issues around that,” Fluor spokesman Jerry Holloway told the Globe.

‘Certain Difficulties’

Putnam did admit though that it “faced certain difficulties curbing excessive trading” by members of the boilermakers local. 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 boilermakers local 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.