Posted on 11/03/2003 4:39:52 PM PST by NormsRevenge
NEW YORK (Reuters) - Fallout from the mutual fund probe erupted on Monday as the head of one of the nation's biggest fund companies was forced out and securities regulators found more firms may have engaged in improper trading.
U.S. regulators also accused nearly 450 brokerage firms of overcharging investors for mutual fund purchases and said tens of million of dollars of refunds may be necessary.
The U.S. Securities and Exchange Commission (news - web sites) told lawmakers at a Washington hearing that 10 percent of top mutual fund companies may have been involved in illegal late trading.
Once seen as a safe haven for mom and pop investors, the mutual fund industry has become "the world's largest skimming operation," said Sen. Peter Fitzgerald, chairman of the Senate Subcommittee on Financial Management.
Lawrence Lasser, who built Putnam Investments into the No. 5 U.S. mutual fund company, became the biggest casualty of the deepening probe into the funds industry when he was ousted by Putnam's corporate parent, the insurance broker Marsh & McLennan Cos. Inc.
The maelstrom on Monday also claimed the chief of the SEC's office in Boston, Juan Marcelino, who will step aside. A Putnam whistle-blower said he was ignored by the agency for months until state regulators took note and moved to filed charges.
The SEC and the state of Massachusetts plan to file fraud charges against former Prudential Securities brokers, a spokesman for the state's top securities regulator, Secretary of the Commonwealth William Galvin, said on Monday.
PINK SLIP FOR PUTNAM'S CEO
Putnam's Lasser is the most senior executive to lose his job as regulators investigate the $7 trillion U.S. mutual fund industry. Last week, state pension plans pulled more than $4.3 billion out of Putnam funds after the company was charged with securities fraud.
Putnam, which has denied any wrongdoing, is struggling to halt customer defections.
Lasser, 60, was known as a hard-driving CEO who transformed Putnam from a sleepy company into a high-flying firm that built a reputation with big bets on growth stocks.
He was also known as one of the industry's best-paid executives. He earned more than $130 million in the past five years, even though Putnam delivered subpar results and investors pulled more money from it than any other fund company.
"Many people see that Lasser was responsible for Putnam's lack of ability to weather the bursting of the tech bubble. This was another strike against him," said Roy Weitz, who runs the industry watchdog Web site FundAlarm.com.
Lasser was in line for a payment of $15 million and a deferred payment estimated at $16.7 million, but his employment contract is under review to determine the company's obligations to him, a Marsh & McLennan spokesman said.
Marsh & McLennan said Charles Haldeman, 55, who joined Boston-based Putnam last year as senior managing director and co-head of investments, would succeed Lasser as president and chief executive.
Marsh & McLennan also named A.J.C. Smith, a former Marsh chairman and CEO, as Putnam's new chairman. The company appointed Steven Spiegel, a senior managing director and chief of global distribution, to the new position of vice chairman at Putnam. And it hired Barry Barbash, a partner in the law firm of Shearman & Sterling and a former SEC director of investment management, to conduct an independent review of Putnam's controls and policies.
REGULATORS CITE RAMPANT ABUSE
Federal regulators on Monday painted a picture of widespread trading abuses in the mutual fund industry in presenting Congress with findings from a sweeping search of securities industry documents.
The SEC said more than a quarter of top U.S. brokerage firms have let customers illegally trade mutual fund shares after hours at prices set at the close of trading.
The agency also found about 30 percent of fund firms indicated they had disclosed their portfolio holdings to selected clients more often than others, also a possible violation.
In the overcharging of customers, the SEC and the National Association of Securities Dealers said investors were not given volume discounts applied to front-end charges investors pay when buying Class A mutual fund shares.
The NASD estimated at least $86 million is owed to investors for 2001 and 2002 alone, the SEC said.
An academic whose work was cited by New York Attorney General Eliot Spitzer in his initial announcement concerning the mutual fund probe said research showed market timing was widespread.
Eric Zitzewitz, an assistant professor of economics at Stanford Graduate School of Business, said market timing was found in 90 percent of the international funds he researched, and evidence of late trading was found in 30 percent.
"This whole episode is going to have a significant effect on the way funds are governed by the time all is said and done," Zitzewitz said. (Reporting by Svea Herbst-Bayliss, Mark Wilkinson and Tim McLaughlin in Boston, Jake Keaveny and Greg Cresci in New York, and Kevin Drawbaugh in Washington)
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