Investors pulling out of Putnam
By Tim Quinson
Bloomberg News Service
Putnam Investments' customers pulled an estimated $9.7 billion of funds in less than two weeks after the mutual-fund manager became the first company charged with fraud in the widening investigation of the $7 trillion industry.
The withdrawals, representing about 3.5 percent of Putnam's assets, include about $3.9 billion redeemed by mutual-fund investors from Putnam's stock funds, according to AMG Data Services in Arcata, Calif.
An additional $5.8 billion is being pulled by institutional clients such as state pension funds in Massachusetts, Rhode Island and Iowa.
(In Hawai'i, the state Employees' Retirement System voted yesterday to fire Putnam, pulling out $440 million.)
"To lose so much money in such a short time is probably unparalleled," said Burton Greenwald, an industry consultant in Philadelphia, who estimates that the redemptions at Putnam will result in the loss of at least $32 million in annual management fees.
A net $854 million was redeemed from all U.S. equity funds in the week ended Wednesday, according to new data released by AMG, which tracks mutual fund buying and selling. That was the first week of outflows since the state attorney general in New York, Eliot Spitzer, initiated the mutual fund trading probe on Sept. 3.
The inquiry focuses on improper trading that gave some customers access to prices that weren't available to all investors. It has ensnared some of the industry's biggest companies such as Putnam, Janus Capital Group Inc. and Alliance Capital Management LP.
Putnam's spokeswoman, Sinead Martin, declined to comment. The company is a unit of New York-based insurer Marsh & McLennan Cos.
Charles Haldeman, 55, Putnam's new chief executive, has been meeting with clients, along with Marsh & McLennan Chairman Jeffrey Greenberg, to try to assuage their concerns. Haldeman's predecessor, Lawrence Lasser, 61, was ousted earlier this week.
California's state treasurer, Philip Angelides, recommended on Tuesday that the California Pubic Employees' Retirement System and the California State Teachers' Retirement System terminate contracts with Putnam, which oversees $1.5 billion for the two pensions.
"Putnam has failed to meet the standards that we, as fiduciaries, should expect from a firm handling billions of dollars on behalf of pensioners and taxpayers," Angelides said in a statement.
Putnam is "on watch" for possible termination by pensions in Connecticut, Oregon, Washington and Florida, representing another $2 billion of assets, those funds said.
Interpublic Group of Cos., the world's second-largest advertising company, has fired Putnam as a manager for its 401(k) retirement program, said a person familiar with the decision. Interpublic spokesman Philippe Krakowsky declined to comment.
Merck & Co., the No. 2 U.S. drugmaker, which offers two Putnam funds in its 401(k) plan, "is extremely concerned" and is "closely monitoring the situation" but has not taken any action as yet, said company spokesman Tony Plohoros.
Even before the fraud charges, Putnam was struggling to keep investors. About $8.8 billion was pulled from Putnam's stock and bond funds during the first nine months of 2003, according to Financial Research Corp. of Boston.
Marsh & McLennan stock has dropped 9.5 percent since Sept. 16 when Massachusetts regulators said they were investigating Putnam. It rose 53 cents yesterday to $44.87 in New York Stock Exchange composite trading.
Former employees at companies including Bank of America Corp., Fred Alger Asset Management Inc. and Prudential Securities Inc. also face allegations for allowing privileged clients to frequently trade mutual fund shares, siphoning profits from long-term individual investors. State and federal regulators are, in addition, examining after-hours trading of mutual fund shares, which is illegal.
The disclosures have prompted U.S. lawmakers to push for rules to tighten oversight of an industry responsible for the savings of about 95 million Americans.
The investigation into the mutual fund industry followed April's $1.4 billion settlement between Spitzer and 11 Wall Street firms for allegedly misleading investors with biased equity research.
Investor confidence has been rocked by "unremitting stories of scandals," Marc Lackritz, president of the Securities Industry Association, said yesterday.
The NYSE ousted its chairman, Richard Grasso, on Sept. 17, following the disclosure of compensation totaling $140 million; Credit Suisse First Boston's former top technology banker Frank Quattrone is being charged in a probe into allocation of shares by securities firms; and Wall Street firms face lawsuits since the collapse of Enron Corp. and WorldCom Inc.
$422 billion in 2000
Putnam's assets peaked at $422 billion in March 2000, at the height of the Internet stock bubble, from $20 billion when Lasser took over. The company, which managed $277 billion at the end of October, sells most of its funds through outside brokers and financial advisers.
Massachusetts Secretary of the Commonwealth William Galvin and the U.S. Securities and Exchange Commission have charged Putnam and two former money managers with fraud.
The civil complaint from Galvin alleges that former Putnam money managers Omid Kamshad, 41, and Justin Scott, 46, took advantage of inside knowledge about international funds they oversaw, generating quick profits for themselves at the expense of their customers. Some executives at Putnam knew about the trading and failed to stop it, according to the Galvin.
The investigation is continuing and more charges against Putnam employees may be brought, according to Galvin, who says Putnam must reimburse fund shareholders for millions of dollars.
Putnam, like other fund companies named in the investigations, is facing class-actions lawsuits. Marc Henzel, a Pennsylvania lawyer, said yesterday he filed suit in federal court on behalf of Putnam shareholders from 1998 to 2003.
Spitzer has said he may bring charges against at least 10 mutual fund companies for giving special trading privileges to some customers, mainly hedge funds. The SEC investigation has broadened to include a review of whether money managers channeled sought-after shares of initial public offerings to their hedge funds' clients rather than to funds that charge lower fees.
Regulators investigating mutual funds have identified two types of trading abuses. Both take advantage of the fact that fund shares are priced once a day at 4 p.m., New York time, even though the securities they own may trade continuously.
Spitzer told a U.S. Senate subcommittee this week that fund companies will pay penalties that "impose pain." He also recommended that each mutual fund have a chairman who's independent of the management company.
Alliance Capital, the biggest publicly traded U.S. money manager by assets, said yesterday that the SEC may penalize it for improper mutual fund trading.