Putnam Charged in Fund Probe

The inappropriate trading activity by Scott and Kamshad dates back to 1998, with the two men often making short-term trades worth hundreds of thousands of dollars. The regulators contend Putnam knew what Scott and Kamshad were doing as early as January 2000 and told the men to stop. But they allegedly didn't and Putnam did nothing about it.

In fact, it wasn't until this September, when regulators began looking into the trading activity at Putnam, that the mutual fund family began taking action against its wayward employees. It was just last week that Putnam issued a press release admitting that some of its employees had engaged in market-timing.

The irony is that while Putnam looked the other way at market-timing by its own employees, the company did take some steps to prohibit short-term trading by its investors.

Still, even those steps were not enough to stop a group of investors affiliated with the Boilermakers trade union from market-timing some fund shares over a three-year period.

Meanwhile, Veras Investment Partners, a Texas hedge fund, might have enquired with Putnam about the possibility of market-timing some its funds. One of the exhibits to the Massachusetts complaint is an email from a Putnam official to a person at "veras funds'' explaining Putnam's policy of deterring investors from engaging in market-timing.

This is not the first time that Veras, a 2-year-old statistical arbitrage hedge fund out of Sugar Land, Texas, has surfaced in the mutual fund trading scandal. Two weeks ago, a former Fred Alger Management executive pleaded guilty in a New York state court to trying to destroy emails documenting a potentially improper trading relationship between some Fred Alger funds and the Veras hedge fund. Spitzer's office, which secured the conviction, has served a subpoena on Veras.

Veras officials did not return a telephone call. The hedge fund's lawyer also was unavailable for comments. Massachusetts regulators also declined to comment.

Spitzer's office is looking into allegations that a hedge fund may have been permitted to make illegal "late trades" in shares of some of the mutual funds sold by Alger.

In bringing separate actions Tuesday, it appears there is little cooperation between the SEC and Massachusetts officials. By contrast, Spitzer's office and the SEC appear to have a more coordinated investigation. For instance, Spitzer's office and the SEC have issued joint press releases in pursuing mutual fund industry wrongdoing. No joint press release was issued in today's action against Putnam.

In fact, there may even be a degree of hostility between the SEC and Galvin's office. The Wall Street Journal on Tuesday featured an interview with a former Putnam employee who said he went to Galvin's office with allegations of wrongdoing at the fund family after being rebuffed by the SEC.