Mutual Fund Investigation
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Corporation Law
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In November 2003, Putnam Investments came under investigation by the
Securities and Exchange Commission for market timing fraud.
Putnam reached a partial settlement with the Securities and Exchange
Commission over allegations it committed civil fraud by failing to
crack down on in-and-out fund trading, also called market timing, by
some customers and employees.
The settlement outlined remedial actions and a process for providing
restitution to customers but left the amount of any fine undecided.
Nevertheless, several class action lawsuits are cropping up around the
country, by mutual fund shareholders who feel they were wronged by
Putnam Investments.
Market timing is the rapid trading of fund shares designed to take
advantage of short-term discrepancies between a fund's share price and
its underlying holdings. Although market timing isn't necessarily
illegal, regulators say that if mutual-fund companies with anti-timing
rules permitted such trades while profiting from those arrangements,
that could be a violation of securities laws.
For an easier explanation of market timing, by analogy, The New York
Times Paul Krugman offers this: "You're selling your house, and your
real estate agent claims that he's representing your interests. But he
sells the property at less than fair value to a friend, who resells it
at a substantial profit, on which the agent receives a kickback. You
complain to the county attorney. But he gets big campaign contributions
from the agent, so he pays no attention. That, in essence, is the story
of the growing mutual fund scandal."
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Corporate and Securites Law