Putnam Charged in Fund Probe

Updated from 11:38 a.m. EST

State and federal securities regulators filed civil charges against Putnam Investments and two portfolio managers in the ever-expanding mutual fund trading scandal.

The charges were filed Tuesday in separate civil securities fraud actions brought by the Securities and Exchange Commission and Massachusetts Secretary of the Commonwealth William Galvin.

Putnam, a division of Marsh & McLennan(MMC Quote), is the first mutual fund family to be charged in the trading scandal. The Boston-based fund family engaged in securities fraud by failing to disclose that two of its managers "engaged in excessive short-term trading of Putnam mutual funds" for their own benefit, according to the charges.

But Putnam probably won't be the last fund family to face charges.

The SEC has identified at least 40 mutual fund families that permitted outside investors to engage in market-timing, an arbitrage strategy that allows savvy traders to take advantage of the time differences between the closing of U.S. and foreign exchanges.

Most mutual funds say they prohibit market-timing because the rapid in-and-out trading can dilute the value of a fund's holdings and hurt other investors.

Meanwhile, New York Attorney General Eliot Spitzer is moving ahead with his investigation into late-trading, an illegal activity in which favored customers are allowed to buy mutual funds that were priced prior to the release of market-moving news. Spitzer's office already has gained two criminal convictions in that inquiry.

It was Spitzer's office that spurred other regulators, including the SEC and Galvin, to begin looking at the entire $7 trillion mutual fund industry for cases of illegal and unethical trading activity.

The two former Putnam fund managers charged by Galvin and the SEC are Justin Scott and Omid Kamshad. Both men were charged with securities fraud and engaging in market-timing in shares of their own company's funds.

The complaints filed by the SEC and Massachusetts regulators allege that at least four other Putnam employees engaged in market-timing. In all, the trading activity allegedly produced more than $1 million in gains for the six employees.