Putnam Investments Securities Enforcement Case: Employee Trades the Oversight System Failed to Stop

In the Putnam Investments securities enforcement case, the adviser agreed to reforms addressing SEC allegations of undisclosed employee market timing and failed oversight. Its November 2003 partial resolution addressed employee market timing through trading restrictions, compliance reforms and stronger fund-board oversight. If you reviewed personal trades or compliance reports inside a mutual fund business, this case connects the employees’ trades to the adviser’s duties to fund shareholders.

The company in the SEC’s announcement was Putnam Investment Management LLC, a registered investment adviser in Boston. This page follows its employee-trading and oversight failures. Our page on mutual fund market timing and late trading covers the broader trading practices and the distinction between them.

The SEC Challenged Disclosure and Supervision

The SEC’s November 13, 2003 announcement described the settlement order’s findings of securities fraud through undisclosed, potentially self-dealing employee trading. The SEC faulted Putnam’s internal controls and supervision for failing to detect and deter that trading, and described the conduct as a breach of the adviser’s duties to investors.

An investment adviser controls investment decisions, fees, allocations and conflicts. The SEC’s interpretation of an adviser’s duties says an adviser owes its clients care and loyalty, and must disclose conflicts so clients can make informed decisions. Those responsibilities explain why a personal-account trade can raise a question about the firm overseeing it: employees make the trades, while the adviser controls supervision and disclosure.

Putnam agreed to restrictions on employee trading, stronger compliance policies and staffing, and changes to fund-board independence. We see an adviser overseeing other people’s investments while the SEC faulted it for failing to police its own employees’ trades. The SEC’s answer reached from the trading account to the people supervising the supervisors.

Employee Market Timing in Putnam Funds

The Putnam resolution concerned excessive short-term and market-timing trading by employees. Putnam agreed to a process for calculating and paying compensation for losses attributable to that trading.

The SEC also described a separate civil action charging two Putnam portfolio managers with securities fraud for excessive short-term trading in Putnam funds through their personal accounts. The SEC accused the managers of making the trades and faulted the adviser for failing to disclose and deter them. For an insider, the connection runs between what an employee did in an account and what the company did about it.

Putnam’s Employee-Trading Restrictions

Putnam agreed that employees investing in its funds would have to hold those investments for at least 90 days, and in some cases as long as one year. The restriction addressed the short holding periods at the center of the SEC’s account.

For a personal-trading reviewer, that requirement points to a concrete comparison: the purchases and sales in an employee’s account against the holding restriction governing them. We connect those records with the company’s review and response when assessing similar conduct. Knowing who traded is one part of that account. Knowing who could see and act on the trading is another.

Compliance Reports Had to Reach the Fund Boards

Putnam agreed that its chief compliance officer would report all breaches of duties to investors and violations of federal securities laws to the fund boards’ independent trustees. That requirement gave the reporting a named destination outside the employees whose trading was under review. A compliance employee’s view of what reached that destination can matter as much as the original trading report.

The reforms assigned different work to the review bodies:

• Code of Ethics Oversight Committee. Review violations of the code and report breaches to the fund boards of trustees.
• Internal Compliance Controls Committee. Review compliance controls and report compliance matters to the fund boards.
• Independent Compliance Consultant. Review policies and procedures designed to prevent and detect breaches of duties to investors, ethics-code breaches and federal securities-law violations by Putnam and its employees.

Putnam also agreed to an independent third-party review at least once every two years. That review covered supervisory, compliance and other policies and procedures tied to its work for the funds.

These provisions give an insider’s account specific connections to make. A trade review, an ethics finding, a committee report and a report to trustees describe different points in the same oversight process. We examine how the information moved between them and which decisions followed it.

Independent Trustees Needed Authority and Their Own Staff

Putnam agreed that its fund boards would have independent chairs and at least 75% independent members. No board action could proceed without approval from a majority of the independent directors.

The fund boards would have their own independent staff member to help monitor Putnam’s compliance with securities laws, duties to shareholders and its ethics code. For someone preparing board materials, the vote and the information available to the board each tell part of the story.

What an Insider Can See Between the Trade and the Board Report

Personal-trading records can show the transaction. Compliance and board materials can show the response. Putnam’s reforms connect those responsibilities explicitly, from holding periods through ethics review to independent trustees. We work with insiders to connect the records behind those decisions to what they saw in their normal work.

In the 2018 Journal of Forensic & Investigative Accounting study The Significance of Whistleblowing as an Anti-Fraud Measure, analysis of occupational-fraud data associated more anti-fraud measures with a greater likelihood that whistleblowing would be the detection method. The study suggests that controls can help people recognize warning signs, and puts the expectation behind a report plainly:

In Putnam’s reforms, the reporting obligations, independent reviews and board authority supplied specific places to test that expectation. If you know how a trading concern traveled through a mutual fund business, your knowledge can connect a transaction to the supervision surrounding it. That is the conversation we want to have with you.

SEC whistleblowers can receive a share of qualifying sanctions collected through the SEC whistleblower program. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That separate law concerns fraud against the government. We assess which program fits the conduct you know.

You Know What Reached the Trustees

If you know about personal trades that escaped review or compliance findings that never reached the fund board, speak to one of our Whistleblower Experts about the trades you saw. We build the case around your knowledge of the trades and the decisions surrounding them, and bring in securities fraud whistleblower lawyers who understand investment-adviser supervision. We stay beside you through that work to build your strongest securities whistleblower case.