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6 at Putnam tied to prohibited trades

4 money managers forced from jobs

Four money managers of Putnam Investments, including its head of international investing, are being forced out of their jobs for using their personal accounts in 2000 to rapidly trade in and out of mutual funds that they managed, despite company policies that forbid such market timing.

The money managers, along with two other Putnam employees, made profits of approximately $700,000 on the prohibited trades, according to Putnam officials.

The disclosures, made yesterday in response to inquiries from the Globe, directly contradict statements by Putnam this week that the market-timing scandal that has engulfed the mutual fund industry has been limited to a "minimal" number of outside individual investors. Instead, the problems also appear to reach into the highest levels of the company itself.

Putnam, founded in 1937, is the fifth-largest fund company in the nation, and the second-largest in Boston after Fidelity Investments, managing $272 billion in assets for 12 million investors.

Secretary of State William F. Galvin, who has led the investigation of Putnam, said he was "stunned" at the disclosure, calling the trading "fundamentally dishonest." The managers, he said, violated their duty to protect the long-term interests of their funds' investors. "They took advantage of, in effect, insider trading to do market timing to pick the pockets of their own customers. The profits they made didn't come out of thin air; they came from the funds they were supposed to be protecting."

Galvin was already preparing to charge Putnam with civil securities fraud Tuesday for allegedly allowing groups of outside investors to market-time the Boston company's funds. Yesterday, his office said it now expects to charge the six Putnam executives with fraud as well.

Some of the trades were for than $1 million, government and Putnam officials said, and were concentrated in Putnam's international funds. The employees were told by Putnam senior managers in 2000 to stop such trading, after their activity was detected by monitoring systems the company established to catch market timers.

"We considered what the people were doing at the time to be inconsistent with what we felt to be appropriate for employees to be doing in terms of trading a mutual fund," said Putnam general counsel William H. Woolverton. "And you can call it market timing. You can call it excessive short term trading. Whatever you call it, it went through our screens and we detected it. We sat down with these people and said, `Look we don't think this is the right thing for you to be doing, to be engaging in this type of activity.' And they agreed, and they stopped doing it."

But Galvin said that for Putnam to wait three years to disclose the trading activity undermines the company's claim that it acted responsibly. "That the company protected them for three years, took no action and never sought to reimburse anybody for anything, until we caught them, suggests that the company's culpable," Galvin said. "It isn't a few rogue managers who did this. The company's responsible."

The 1999 prospectus for Putnam's International Voyager fund, since renamed International Capital Opportunities, for example, said the fund "is not intended as a vehicle for short-term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders."

Woolverton said Putnam decided to make the disclosure now, while being investigated by the state and the federal Securities and Exchange Commission, because of the increased sensitivity toward market timing. "Times changed; the climate's changed; opinions changed," Woolverton said. For that reason, Woolverton said Putnam will also reimburse the funds in the amount the profits its employees made from their trading activity.

Putnam declined to name the six individuals involved, but yesterday Charles "Ed" Haldeman, Putnam's co-head of investments, said the four money managers would be leaving the firm, though he declined to say when they were leaving, or the terms of their departure.

"I want to be absolutely clear to everybody that those people should not manage money at Putnam," Haldeman said.

Nonetheless, Woolverton insisted that the managers' frequent trading was not illegal. Indeed, market timing, which involves rapidly trading in and out of mutual funds to take advantage of inefficiencies in the market, is not against the law. Overseas funds are particularly susceptible to market timing because of the time differences involved. Putnam and many other mutual fund companies say they aggressively try to prevent it because such frequent trading hurts fund performance, especially for long-term investors. Regulators are looking into whether mutual fund companies are overlooking their own rules to favor some investors over others.

Even before the disclosures around market timing, Putnam was weathering one of the most difficult periods in its 66-year history. Putnam's funds were overinvested in technology stocks when the Internet bubble burst in 2000, and many of them performed far worse in 2001 and 2002 than their peers. Investors have responded by withdrawing $18.4 billion from Putnam funds in the past two years. Putnam's chief executive, Lawrence J. Lasser, also has drawn heavy criticism for his salary and bonuses. In the last six years, Lasser's compensation has exceeded $117 million, according to company filings.

The Securities and Exchange Commission also is investigating the employee trading at Putnam. "The SEC takes the type of conduct that's being alleged to be extremely serious," said Juan Marcelino, administrator of the SEC's Boston office. "And the SEC would take aggressive action on such conduct at the end of its investigation."

Meanwhile, another government official involved in the investigations said the multiple probes of the mutual fund industry are gathering "evidence" that the market-timing in the personal accounts of fund managers "is a problem not confined to Putnam."

On Wednesday Galvin subpoenaed trading records of Omid Kamshad, who is now chief investment officer for international equities, and Justin Scott, who now heads the firm's specialty growth investing team. Kamshad did not respond to calls and e-mails seeking comment; Scott declined to comment last night.

Kamshad's attorney, John Gilmore, said, "Mr. Kamshad has an exemplary professional reputation and has for his entire career. The trades you're looking at fully complied with all rules, regulations and statutes." He declined to comment further.

A Feb. 18, 2000, memorandum obtained by the Globe recounts a conversation between Kamshad and Richard B. Tibbetts, a Putnam human resources official "regarding large and frequent movement of deferred compensation."

"Omid's quick reaction was that he was not `market timing' as he held positions for 2-3 days," Tibbets wrote. "I confirmed our concerns about large amounts of money being moved within short timeframes . . . was inconsistent with out belief in investing over long-term as well and more importantly inconsistent with our tolerances of standard mutual fund clients."

Putnam officials disputed Galvin's assertions, but declined to comment on the memo and trading records because they involved confidential personnel matters. The company also reiterated that the market-timing trading it discovered, whether by employees or 14 members of a New York trades union, involved a relatively small number of individuals.

A spokeswoman for Putnam's parent, Marsh & McLennan Cos., declined to comment.

Putnam officials were unable to say how frequently the six traded, the size of the trades, and how long they traded, but were emphatic in saying the trading stopped in 2000 after the employees were warned. The employees were not disciplined at the time, and were allowed to keep their profits.

But afterward, Woolverton said Putnam officials expressly forbade its investment management professionals from frequent short-term trading.

Andrew Caffrey can be reached at caffrey@globe.com. Scott Bernard Nelson of the Globe staff contributed to this report. Andrew Caffrey can be reached at caffrey@globe.com. Scott Bernard Nelson of the Globe staff contributed to this report.

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