Risk & Compliance

Putnam Settles Market-Timing Complaint

The SEC and Massachusetts will collect a total of $110 million, but only part of that amount will go toward the restitution of investors.
Dave CookApril 12, 2004

Late last week mutual fund company Putnam Investments agreed to pay $110 million to settle charges of improper trading brought by the Securities and Exchange Commission and Massachusetts.

This settlement concludes the SEC and state cases regarding Putnam’s “market timing.” According to The New York Times, however, both the commission and Massachusetts are investigating two former Putnam managers who are accused of trading in company funds for their own profit.

The rapid in-and-out trading that characterizes market timing is not illegal in and of itself, but most funds have policies that forbid the practice (as did Putnam, according to the SEC). Fortune magazine noted that such rapid trading makes it more difficult for fund managers to make money for their other customers. The manager must keep more cash on hand; timing by some participants also means that buy-and-hold customers may face increased capital gains and trading expenses. One academic study cited by Fortune estimated that those long-term shareholders may lose as much as $4 billion each year due to market timing.

The current settlement with the SEC imposes a $50 million civil penalty on Putnam and $5 million in restitution to the mutual funds that had been subjected to market timing. The entire $55 million will be returned to investors, to compensate them for losses and added expenses caused by the improper trading, according to the Times.

Putnam’s settlement with Massachusetts also imposes a $50 million fine and $5 million in restitution, but the Times said that this $50 million will go to the state. William Francis Galvin, the secretary of the commonwealth of Massachusetts, estimated the relevant loss to investors at between $8 million and $11 million, noted the paper. Reportedly he added that although the state would like to return the $50 to investors, “we are limited in what we can do.”

Settlements between regulators and Putnam — which include penalties, restitution, and the value of fee reductions — now total about $1.8 billion, according to the Times. The paper added that according to AMG Data Services, investors have withdrawn almost $30 billion from Putnam’s mutual funds since the SEC and Massachusetts filed suit last October.