US - The Securities and Exchange Commission (SEC) has filed a civil fraud action against six former officers of the Putnam Fiduciary Trust Company (PFTC) for an alleged US$4m defraud.
The SEC alleged that the defendants’ defrauded a defined contribution plan client and a set of mutual funds by means of a one-day delay in investing certain assets of the DC client, Cardinal Health, in January 2001.
The commission’s complaint alleged that the markets rose steeply on the missed day, causing Cardinal Health’s DC plan to miss out on nearly $4m of market gains.
It continued that, rather than inform Cardinal Health of the one-day delay and the missed trading gain, the defendants decided to, “improperly shift approximately $3m of the costs of the delay to shareholders of certain Putnam mutual funds through deception, illegal trade reversals, and accounting machinations.”
The commission further alleged that the defendants improperly allowed Cardinal Health’s DC plan to bear approximately $1m of the loss without disclosing to Cardinal Heath that they had done so.
The six defendants named by the SEC were Karnig Durgarian, a former senior managing director and chief of operations, and principal executive officer of certain Putnam mutual funds (2002 - 2004); Donald McCracken, a former MD and head of global operations services; Virginia Papa, a former MD and director of DC servicing; Sandra Childs, a former MD who had overall responsibility for the compliance department; Kevin Crain, an MD who had responsibility for the plan administration unit, and Ronald Hogan, a former vice-president who had responsibility for new business implementation.
The SEC complaint said Durgarian, Papa, Childs, and Crain had attempted to cover-up the wrongful conduct, to the extent that it was not discovered until January 2004.
The Commission is seeking injunctive relief and fines against the former officers, but has said it would not bring enforcement action against PFTC because of its, “swift, extensive and extraordinary cooperation.”
Ed Haldeman (pictured), president and CEO of Putnam Investments, commented: As soon as we identified the issue, we reported it to the regulators, auditors, and fund trustees; made full restitution of approximately $4m to the affected client and Putnam funds; and took appropriate action against those individuals involved, including terminations. In addition, we disclosed the issue to our clients.
We also conducted a thorough investigation, involving a detailed review by a third party, which confirmed that no other clients or funds had been affected. In addition, we implemented enhanced policies andprocedures to strengthen controls to make sure a situation like this could not happen again.
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