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State and federal regulators took action Tuesday against Putnam Investments and two of its former investment officers, the first formal accusation of wrongdoing against a mutual fund company over “market timing” trading practices in mutual funds. A complaint filed by the office of Mass. Secretary of State William Galvin charges Putnam, Omid Kamshad and Justin M. Scott with violating the Massachusetts Uniform Securities Act. The Securities and Exchange Commission took similar action Tuesday against Putnam and the two investment managers. The actions represent the first steps of civil lawsuits, outlining material facts. But they do not represent criminal charges. They accuse Putnam and the two fund managers of committing civil fraud by allowing market-timing trades despite company policies that prohibit them. Galvin and the SEC both lack prosecutorial power but can pursue civil lawsuits and settlements. Galvin, whose office regulates securities, said he had not referred the matter to the state attorney general’s office. Putnam has denied wrongdoing but last week confirmed that four money managers had lost their jobs, including Kamshad and Scott. A Putnam spokeswoman did not immediately return a call seeking comment Tuesday. John Gilmore, an attorney for Kamshad, did not immediately return a phone message seeking comment. Kamshad’s number is not listed, and there was no answer at Scott’s residence. The complaint accuses Putnam of allowing members of the Boilermakers Local Lodge 5 of New York to make hundreds of late-day trades on funds in their retirement accounts. At least one individual made at least $1 million through market timing, the complaint stated. Separately, the complaint also accused Putnam of allowing Kamshad and Scott to engage in market timing with the funds they oversaw, and said six fund managers engaged in market timing. Kamshad and Scott were cautioned in 2000 but allowed to retain personal profits from the practice, Galvin’s office said. “It’s about cheating,” Galvin said. “It’s about creating a separate category of investors, a highly privileged category of investors, who took advantage of the circumstances of market timing to the detriment of the average investor. This is also about corporate deceit.” The SEC complaints, filed in U.S. District Court in Boston, allege that Scott and Kamshad engaged in “excessive short-term trading of Putnam mutual funds for which they were portfolio managers.” 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 generally set once a day. But if allowed to move quickly in and out of funds, investors can sometimes take advantage of late-day information before the new prices are set. Essentially, profits won by market timers skim money at least indirectly from others who own shares in the funds. Rapid trading is not illegal, but many companies, including Putnam, say they discourage the practice. The Massachusetts complaint is the first enforcement action against a mutual 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. 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. Copyright 2003 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

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