Massachusetts securities regulators planned to file a civil complaint Tuesday against Putnam Investments, a source familiar with the matter said – the first formal accusation of wrongdoing against amutual fund company in the scandal over “market timing” transactions.
The widely expected move, which would outline a civil case against Boston-based Putnam but does not represent a criminal charge, is the latest development in a multifaceted investigation into the mutual fund industry, which had been largely immune from the corporate scandals of recent years.
Secretary of State William Galvin scheduled a news conference for 10 a.m. Tuesday to announce a civil enforcement action. The source, who spoke on condition of anonymity, said the action would name Putnam.
Nancy Fisher, a spokeswoman for Putnam, said the company had no comment.
The complaint was expected to lay out evidence compiled by Galvin’s office concerning market timing by clients of Putnam, the No. 5 mutual fund company. The Boston Globe reported last week that Putnam would face a civil complaint.
Market timing is the practice of trading quickly in and out of mutual funds to take advantage of price lags, particularly involving overseas funds where values may be affected by the trading of shares in different time zones.
Mutual funds are generally intended for long-term investors, and prices are set once a day. But short-term traders can sometimes take advantage of late-day information before the new prices are set. The process is not illegal, but many companies, including Putnam, say they discourage the practice since it tends to skim money at least indirectly from other shareholders.
Massachusetts regulators are expected to allege that it is fraudulent to claim in a fund prospectus that market timing is discouraged and then allow some customers to get away with it. Putnam has denied wrongdoing but on Friday said that four money managers had lost their jobs for trading funds improperly.
The Massachusetts complaint is the first enforcement action against a fund company.
However, New York Attorney General Eliot Spitzer has brought charges against individuals at fund companies, as well as targeted a hedge fund, as part of the widening investigation into mutual fund trading.
Earlier this month, James P. Connelly Jr., a former vice chairman and chief mutual fund officer at Fred Alger & Co. pleaded guilty to a felony for trying to cover up improper trading of mutual funds. He also agreed to pay a $400,000 civil penalty to settle an SEC complaint.
Also in October, Steve Markovitz, a former broker with Millennium Partners hedge fund, pleaded guilty to a felony charge for illegal late trading of mutual fund shares.
In September, hedge fund Canary Capital Partners LLC and its managers settled with New York authorities and agreed to pay $30 million in restitution for profits generated from unlawful trading and a $10 million penalty.
A former Bank of America broker, Theodore Sihpol III, faces larceny and securities law violations in connection with the Canary case. Sihpol has pleaded innocent.
