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Putnam Got Away with Timing for Years It's Deja Vu All Over Again at Putnam

Fund managers placing their own interests ahead of those invested in the funds.

Senior management turning a blind eye to future misdeeds by failing to punish offenders severely.

Sound familiar? This, in fact, happened at Putnam Investments back in the 1980s -- proving that issues over timing and ethics have run rife in the mutual fund industry for years.

The individuals involved were given little more than a slap on the wrist once Putnam senior management became aware of the activities.

At issue back then was the illegal practice of front-running and the foggy area of personal trades by professional fund managers.

Former Putnam employee Edward A. H. Siedle brought a lawsuit against the Boston-based, $277 billion fund giant stemming from his departure from the firm in 1988. The lawsuit contained allegations that Putnam fund managers asked colleagues to hold off on trades so that certain managers could buy securities ahead of the fund in order to take advantage of its huge buying power and ability to drive up the price of the stock.

The firm denied that managers were asked to delay stock purchases, but admitted it did take action against a senior investment professional for trading violations.

During a three-month span in 1988, Thomas O'Neill, then a manager at Putnam, made 176 personal trades, buying securities ahead of Putnam funds, in some cases, at lower prices than investors paid, according to internal memos. He also bought options and, in at least eight instances, made trades despite being denied permission by the firm's legal department.

For his disobedience, O'Neill was "punished" by being limited to 20 personal trades over a 30-day period and asked to help the firm rewrite its code of ethics.

Speaking in 1997, recently-ousted CEO Larry Lasser called Putnam's actions against O'Neill "profoundly severe."

"If something equivalently extreme happened [today], that person could not work here," Lasser added.

However, recent developments in the probe into mutual fund trading practices indicate otherwise. Two of Putnam's top executives, Omid Kamshad and Justin Scott, who served as the firm's investment chiefs, were guilty of market timing their own funds as far back as 1998, and Putnam knew about this in 2000. The dynamic duo were warned to curb their activities, but remained with the firm up until last month. Putnam did not make either of them return the $700,000 in profits they reaped.

"Our systems were not perfect, but they did identify and enable us to stop the vast majority of market timers in Putnam funds," said Laura McNamara, a spokeswoman for Putnam, noting the firm has several so-called "triggers" to spot market timing.

Manifestation of a Culture'

"I think this strongly suggests, at least with Putnam, that the most recent scandals were a manifestation of a culture that Lasser had established," said Roy Weitz, industry critic and publisher of "It's not exactly the same fact pattern as the [front-running] issue, but the general outline of the manager putting his or her financial interests ahead of the clients' interest is the same as" in the scandal of 2003.

Industry insiders suggest that Putnam's corporate culture may have inadvertently condoned this activity by its failure to punish offenders. Many were surprised that Lasser would allow this type of activity because of his reputation as a hard driver and a man of integrity.

"It is strange to think that Larry and the firm allowed this course of action and that if was not dealt with swiftly," one industry veteran said, asking to remain anonymous. "One would have suspected they would have been dealt with this with a heavy hand."

On the other hand, others have noted how Putnam's assets have doubled since Lasser took over the helm, also, how the company moved into aggressive growth funds to capture the euphoria and the dollars of the bull market. In driving people hard to boost assets, critics say, Lasser may have created an environment at Putnam that did not focus, as it should have, on ethics and compliance. As point in fact, Lasser's office was next to the marketing department.

McNamara said the firm takes regulatory and ethical issues with the "utmost seriousness" and stated emphatically that questionable or illegal conduct has no place at the firm, which has more than 5,000 employees.

"We are profoundly disappointed by what a few individuals have done at Putnam," McNamara said. "However, it would be a mistake to conclude that this kind of conduct characterizes Putnam as a whole or the way we manage investments."

"I'm not an expert in corporate culture issues, but I can't imagine, for better or worse, what defines a corporate culture better than ethics and illegal activities," Weitz said. "If you don't have a corporate culture that reacts swiftly to legal or ethical issues, it's a good indication there is a problem."