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Can Putnam Win Back Investors' Trust?


In the mutual-fund world, Lawrence J. Lasser was known both for building Putnam Investments into a powerhouse and for running it as his own private kingdom. The demanding boss monitored everything from the quality of the cookies in the cafeteria to each fund manager's quarterly performance. And for a long time, Lasser's autocratic style paid off big time for Putnam, parent Marsh & McLennan Cos. (MMC), and Lasser himself: Putnam assets under management grew from $24 billion in 1986, when Lasser took over, to $425 billion at its 2000 peak.

But the gears in Putnam's money-making machine have all but ground to a halt. The company's tech-heavy funds began a steep slide in 2000, sparking an investor retreat at a rate of about $1 billion a month. The stampede picked up speed after federal and state regulators on Oct. 28 charged Putnam with fraud for allegedly letting some fund managers trade their funds at the expense of shareholders. Putnam has denied wrongdoing and promised restitution. But it wasn't enough to save Lasser. On Nov. 3, Marsh CEO Jeffrey W. Greenberg said the 60-year-old giant of the mutual-fund biz would be leaving after 33 years at the company. Replacing him as CEO is Charles E. "Ed" Haldeman, a highly regarded veteran money manager who joined Putnam in 2002 to bolster performance.

Haldeman inherits a mess. Since the scandal broke, $4.4 billion has gushed out of Putnam funds, and billions more could leave before the dust settles. Haldeman and Greenberg are working overtime to reassure investors that Lasser's departure clears the way for Putnam to put its house in order. Officials at the Massachusetts state pension fund, which pulled $1.8 billion out of Putnam, say they'll reconsider investing in Putnam next year. Others will take more convincing. "For us to regain confidence in them, they need to put in policies and procedures and monitor them going forward to make sure that it won't happen again," says Paul. J. Tavares, state treasurer of Rhode Island, which dumped Putnam on Oct. 31.

For the new team, the scrutiny will be intense. No one will be watching more closely than Greenberg. Insiders say he was deeply shocked by the scandal and is now heavily involved in damage control. Haldeman, a relative newcomer to Putnam, is the one bright spot, with two solid turnarounds under his belt. But General Counsel William H. Woolverton and newly promoted Vice-Chairman Steven Spiegel, Lasser's No. 2, could come under fire for failing to enforce regulatory guidelines and making sure employees upheld their fiduciary duty to investors. "It seems they were kept in the dark," says Dan McNeela, an analyst with Morningstar Inc. "But that doesn't totally excuse them." Wolverton declined comment, while Spiegel says he was not involved in the investment division and was unaware of the problems.

DRAIN ON ASSETS

The headache may only get worse for Marsh. The company's contribution to the parent's operating earnings shrank from about $1 billion in 2000 to just $364 million for the first nine months of 2003. And the accelerated drain on assets since the scandal broke certainly won't aid Putnam's performance -- hefty fees will disappear with those assets. Marsh's shares, which traded as high as $67 in late 2000, hover around $45 today. Then there's the possible charges for restitution, legal costs, or fines. Although hard to quantify now, they could be huge. In related cases, Canary Capital Partners has paid $40 million to settle trading allegations, and Bank of America Corp. has reserved $100 million to cover scandal-related legal and consulting fees.

Impressive investment results would help offset the pain. But for that, Putnam would need to beef up its stable of stockpickers. Problem is, at this point, attracting that sort of talent may be Putnam's toughest task of all. By Faith Arner in Boston, with Lauren Young and Diane Brady in New York


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