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

For Galvin, Admitting Guilt is First Step For Reform

William Galvin makes no apologies for his outspoken nature or his insistence on twisting the arm of Putnam Investments until the firm cried "uncle."

He has been dubbed the Prince of Darkness by his adversaries and has been accused of grandstanding to fulfill political ambitions, but the Secretary of the Commonwealth of Massachusetts says he is simply doing his job.

"Whenever you are in an enforcement mode, you have to be willing to make the charges, make them stick, do the investigations, and you can't blink," Galvin said. "You have to do your job. Sometimes the accusation is that you just do things for political attention. The alternative would be not doing anything, [which] doesn't make much sense."

His role as secretary is an oddity, a hybrid position charged with overseeing business regulations and elections. Because of a quirk in the state constitution, securities law enforcement falls to Galvin, and not the attorney general's office.

Galvin currently has active cases open against Franklin Resources, for timing arrangements struck with Las Vegas investor Daniel Calugar, which he has called "basically a legal bribe," and Prudential. He has met with both firms, but he wouldn't characterize the talks as negotiations yet.

While Galvin is well known in New England political circles, the Putnam bombshell and the subsequent smattering of tongue-lashings he has given in the press has put him on the national stage.

Putnam Problem

The conservative Democrat, who has been on Beacon Hill since the 1970's and in his current role since 1994, made waves last year when he broke open the Putnam market-timing case, started by tipster Peter Scannell, who was turned away by the SEC's Boston office.

Galvin refused to go along with an SEC settlement in November, saying an the time that he was outraged at the federal agency. "There is a lack of vigorous enforcement, and this merry-go-round is costly to investors," he said back then. "The SEC should expose wrongdoing. Putnam has not come clean. The SEC's enforcement is obviously totally ineffective."

At issue was language included in the agreement with the SEC, which is commonplace in settlements with regulators, where Putnam did not admit wrongdoing.

Galvin, who once called a bald political opponent "Senator Yoda," is now using the full force of his position. He stood his ground and eventually persuaded Putnam to admit wrongdoing in its $55 million settlement with his office, announced on the same day as an additional $55 million agreement with the SEC.

Galvin said non-admission reflects an "unfortunate attitude" prevalent with securities laws violations that the infractions are just business transactions and don't have any real victims. By demanding an admission, Galvin said he is trying to break a pattern among regulators, including his office in the past, of accepting the "neither admit nor deny" language, which he believes is the root cause of some of the recidivist problems in the fund universe.

"There has been this willingness to allow these firms, once it has been established they have engaged in wrongdoing, to pay a fine, to not admit they did anything wrong and to say they'll never do it again. But then, they find a more clever way to do it again. If we're going to end the merry-go-round of accusation and non-admission, I think you have to at some point say if a firm has done something wrong, there needs to be an acknowledgement that it was wrong."

Putnam's woes could continue to grow, however, as a result of its settlement with Galvin's office. The admission of guilt may help investors involved in class-action lawsuits receive punitive damages, something Galvin said was not a motive of his, nor is his problem.

"Those are the consequences that flow from wrongdoing," Galvin said. "Class-action suits go on anyway, and even in the case of admissions, the companies have attempted to tailor the admissions in such a way as to insulate them from a summary judgment in some of these cases."

Galvin's office now has a second probe into whether the firm gave rebates, or what Galvin dubs "payola" to preferred 401(k) clients.

Unlike his counterpart in New York, Attorney General Eliot Spitzer, or federal regulators at the SEC, Galvin has some serious disadvantages, forcing the second-longest-serving statewide officer for Massachusetts to pick and choose his cases carefully. His securities division had 29 staffers and a $2 million budget last year. In fact, during the division's investigation into tainted research at Credit Suisse First Boston during the Wall Street research scandal, Matt Nestor, the division's director, had to hire law students to sift through the 500,000 e-mails that the office had collected.