Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

SEC Has More Bark Than Bite in Putnam Settlement


The Securities and Exchange Commission sure does talk a tough game, but when it came to its settlement with Putnam Investments of Boston earlier this month, the agency was speaking in whispers.

The firm agreed to pay $110 million total in separate settlements with the SEC and Massachusetts Secretary of the Commonwealth William Galvin. However, the SEC seemingly retracted its claws, backing away from the tough language and steep penalties it indicated it would seek if the sides went before an administrative law judge as planned (see MME 4/5/04).

The Commission got Putnam to pay $5 million in disgorgement and $50 million in civil penalties. But, according to previously filed court documents, the SEC wanted the Boston money manager to pay a combination of disgorgement and penalties that could potentially tally the largest settlement ever.

The SEC had sought up to $138 million for the 251 illegal trades the firm admitted its employees made and several fines for the "many more additional improper trades" it planned to prove in court. On top of that, the Commission said the firm kept investors in the dark about the wrongdoing at Putnam for four years, all the while collecting management fees on money that would eventually walk out the door following scandal developments. The SEC had said it wanted that fee money returned too, which could have brought the overall tally to more than $800 million, according to MME calculations, aided by Lipper.

The Putnam case isn't the first time the SEC has swung for the fences. The Commission sought to prohibit Columbia from managing its own mutual funds due to market-timing abuses at the firm, but the sides settled out of court for $140 million, minus the enjoinment.

Putnam and the Commission were set to square off before an administrative law judge, but the uncertainty of court was a gamble neither side appeared comfortable taking. The SEC was basing a number of its arguments on ambitious theories that may have been difficult to prove to a judge, some lawyers say. Other industry watchers note that administrative law judges have not been awarding significant penalties recently, and that even though the SEC lawyers have the ability to appeal any decision to the Commission, a settlement was the safest play.

"When you settle out of court, you have a definite amount you know you are going to receive," said Daniel Newman, a securities attorney with Tew Cardenas in Miami, Fla. and a former SEC enforcement officer in the NY office. "Proving up the damages in this particular type of case would involve a lot of work because you would really need to prove each particular violation that is being alleged," Newman said.

Still others point to the SEC's resources. "The SEC is spread extremely thin these days," said Barbara M. Flom, a principal of Goldberg Kohn Bell Black Rosenbloom & Moritz. "If they can settle these things quickly, even if it is for 10 cents or 15 cents on the dollar, then that puts money in their pocket and it enables them to go that much more swiftly after what still is a huge cast of characters that are under scrutiny."

By going the settlement route, the SEC assured itself of a resolution that was in the many tens of millions of dollars and a penalty that was 10 times the amount of the damage deemed done to fund shareholders. The Commission has typically worked on a one-to-one, damage-to-fine ratio, and had not surpassed that level previously in the scandal. The settlement will also act as a deterrent, said Lex Bono, a partner and chair of the corporate litigation practice group of Blank Rome.

The SEC pre-hearing brief might have been an attempt by regulators to force Putnam to settle, by threatening the worst, some claim. "The SEC asks for as much as it can and pushes beyond the envelope sometimes. The SEC sometimes tries to incrementally change the law by getting people to settle based on their theories," Bono said.

And some of the SEC's claims, particularly the return of fees and disgorgement, may have been difficult to prove to a judge, Newman said. "Certainly, the mutual fund companies can show that they did perform services and therefore the fees are something they think they should receive."

"The monetary sanctions imposed send a strong message that such conduct will not be tolerated," said David P. Bergers, associate district administrator for the SEC's Boston district office. However, the agency declined to comment on the gap between the amount implied in the pre-hearing brief and final settlement sum. Putnam also would not address that topic.

However, despite the discrepancy, some think the balance is just right. "It struck me as being in the right ballpark," said Don Phillips, Morningstar's managing director. "It's a number that's not big for the sake of being big. It's grounded in what the actual damage to shareholders was," he said.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

http://www.thomsonmedia.com http://www.mmexecutive.com