Companies take steps to reassure investors
PBHG Funds ousts co-founders; Putnam settles fraud lawsuit
By GRETCHEN MORGENSON New York Times
Friday, November 14, 2003
Trying to contain deepening investor mistrust, one large mutual fund company ousted its founders Thursday and another settled a securities fraud case brought against it only two weeks ago.
PBHG Funds, an 18-year-old fund company in Wayne, Pa., that ran some of the hottest investment portfolios in the 1990s, announced that it had removed its co-founders, Harold J. Baxter and Gary L. Pilgrim. The ousters followed the discovery that Pilgrim had invested in a private partnership that was allowed to frequently buy and sell the shares of PBHG Funds from March 2000 to December 2001. Such trading, known as market timing — which is considered improper but is not illegal — often uses portfolio information not available to other shareholders, and the frequent trading increases costs for other investors.
Baxter, who was not an investor in the partnership, was aware of its trading in PBHG funds, the company said.
In Boston on Thursday, the management of Putnam Investments settled a securities fraud lawsuit brought by regulators on Oct. 28, agreeing to restrict its employee trading, heighten scrutiny of employees’ practices and strengthen the independence of its fund directors. In its suit, the Securities and Exchange Commission asserted that Putnam had failed to deter and disclose improper and opportunistic trading by a handful of its fund managers who bought and sold shares of funds they oversaw.
Both moves indicate how eager fund companies are to put their involvement in the widening scandal behind them. Each company continues to be under investigation by state and federal regulators.
But even as federal regulators said they were pleased with the settlement they had struck with Putnam, state regulators in Massachusetts and New York who are continuing to investigate the company criticized the agreement, calling it a capitulation by the SEC.
“It’s clear that the SEC is more interested in papering over wrongdoing than uncovering it,” said William F. Galvin, commonwealth secretary of Massachusetts and the first regulator to identify problems at Putnam.
Since early in September, when Eliot Spitzer, the New York attorney general, announced the findings of an investigation into improper trading by hedge funds in shares of mutual funds, securities regulators have disclosed a string of dubious practices at large fund companies that, among other things, allowed their own employees to profit at the expense of other shareholders.
The disclosures have alarmed many investors, who have cashed in billions of dollars in fund shares in recent weeks.
The regulatory scrutiny of fund companies also has cost several executives their jobs. Lawrence J. Lasser, the former chief executive of Putnam Funds, was fired on Nov. 3; although not implicated in the improper trading by Putnam fund managers, he was aware of the activities and did little to stop them. And Richard S. Strong, the founder of Menomonee Falls-based Strong Funds, resigned as chairman on Nov. 2 and may face criminal charges as early as next week for improper trading he conducted for himself, his family and friends, prosecutors have said.
New fund companies continue to appear under the regulatory microscope. On Thursday, FleetBoston Financial said in a Securities and Exchange Commission filing that its subsidiaries had received subpoenas and information requests from state and federal regulators as well as NASD for records relating to mutual fund trading. The company, which recently agreed to be acquired by Bank of America, said it was cooperating fully with the investigation.
Putnam agrees to reforms
Under the settlement, in which it neither admitted nor denied wrongdoing, Putnam agreed to reforms including a requirement that the firm’s employees hold any investments they make in fund shares for at least 90 days and that fund managers hold their investments in the funds they oversee for at least a year. In addition, the election of Putnam directors will be put to a shareholder vote every five years.
Stephen M. Cutler, the director of enforcement at the SEC, said the settlement “involves a significant remedial undertaking that goes well beyond the current legal requirements and gets in place a restitution process now.”
But Spitzer objected to it. “While the SEC’s document puts in place a few governance reforms that are beneficial,” he said in an interview Thursday afternoon, “. . .this document should not be viewed by any mutual fund company as a template for settlement with my office.”
While the mutual fund troubles began with disclosures that some low-level employees had given special trading privileges to big and influential customers, the removal on Thursday of Baxter and Pilgrim at Pilgrim Baxter & Associates, the investment adviser that manages PBHG Funds, provided further evidence that improper trading activities extended all the way up to the executive suite at an increasing number of fund companies.
“The changes that we are seeing now reflect once again a massive breakdown in governance and violation of trust at the top of the mutual fund industry,” Spitzer said.
