Mutual fund officers charged with fraud

WASHINGTON - Six former officers of Putnam Fiduciary Trust Co, a unit of mutual funds group Putnam Investments, have been charged by US regulators over an alleged US$4 million ($5.9 million) fraud scheme and attempted cover-up beginning in 2001.

But the US Securities and Exchange Commission (SEC) said it would not bring an enforcement action against the company itself "because of its swift, extensive and extraordinary cooperation in the commission's investigation."

Putnam Fiduciary is a Boston-based transfer agent owned by Putnam Investments, the mutual funds family controlled by financial group Marsh & McLennan Cos.

The SEC charges versus the ex-officers come as Putnam Investments, the nation's tenth-largest mutual fund family, is recovering from trading scandals beginning in fall 2003 that hurt it and others in the US$8.8 trillion mutual fund industry.

Putnam Investments chief executive Ed Haldeman said that when the problem at Putnam Fiduciary came to light in 2004, the parent company quickly reported it to regulators, auditors and trustees; repaid harmed clients roughly US$4 million; terminated employees involved and disclosed the problem to clients.

In addition, he said in a statement, Putnam investigated on its own and made internal reforms.

The SEC alleged in US District Court in Boston that Putnam Fiduciary in January 2001 was a day late in investing certain assets of health care services and products group Cardinal Health Inc, which was at the time a defined-contribution plan client of the company.

The delay cost Cardinal's defined-contribution plan to miss out on nearly US$4 million in market gains, the SEC said.

"Rather than inform Cardinal Health of the one-day delay or compensate their client for the missed trading gain, the defendants decided to improperly shift approximately US$3 million of the costs of the delay to shareholders of certain Putnam mutual funds through deception, illegal trade reversals, and accounting machinations," the SEC alleged in court.

The SEC said it charged the following former Putnam Fiduciary employees: operations chief Karnig Durgarian, global operations services head Donald McCracken, defined contribution servicing director Virginia Papa, managing directors Sandra Childs and Kevin Crain, and vice-president Ronald Hogan.

The SEC also charged that the defendants improperly allowed Cardinal's plan to bear about US$1 million of the loss without disclosing this to Cardinal, and that Durgarian, Papa, Childs, and Crain tried to cover up the wrongful conduct.

Gary Matsko, attorney for McCracken, said his client has co-operated fully with the SEC.

"He intends to defend the charges. He maintains he hasn't done anything wrong," he said.

Anthony Mirenda, attorney for Crain, said his client "will fight this to clear his name because he did not participate in any fraud." Mirenda said Crain drew the attention of internal auditors to the problems and co-operated with authorities.

Attorneys for Durgarian, Hogan and Papa could not be reached for comment. John Sten, an attorney for Childs, declined to comment.

In declining to charge Putnam Fiduciary, the SEC said it took into account the company's prompt self-reporting, its internal probe and other steps like those outlined in the precedent-setting 2001 Seaboard case. That decision set standards for how to co-operate with the SEC and held out the possibility of leniency for companies that meet the standards.

In the Putnam Fiduciary case, "the commission has sent a strong signal that should make it easier for a company to decide whether to self-report misconduct," said SEC Deputy Enforcement Director Walter Ricciardi in an interview.

- REUTERS