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Commentary: In A Scandal, Being Nice Helps


It might seem at first blush that Putnam Investments Inc. and MFS Investment Management Inc. are two peas in the same malodorous pod. Both Boston-based companies stand accused of allowing a handful of traders to benefit from improper trading at the expense of the rest of the firms' customers. But the similarities end there.

The damage to MFS investors was far worse, but the company has been barely dented by the scandal, and on Feb. 5 it skipped away with a wrist slap from the Securities & Exchange Commission and New York and New Hampshire regulators. Meanwhile, Putnam has seen its customers flee and its reputation battered as it wrangles over a settlement with Massachusetts authorities.

Why the glaringly disparate treatment? Part of the reason is timing. News of Putnam's alleged wrongdoing broke in mid-October and was the sole focus of media attention -- and, Putnam execs complain, leaks -- for many weeks. MFS's troubles came in early December, after the media attention to the fund crisis had died down. MFS's ability to escape drastic consequences is also an object lesson in the virtues of savvy crisis management -- and of how regulators can lose their bite when targets jump to cooperate.

Putnam, whose net outflows totaled 20% of assets in the fourth quarter -- while MFS's assets rose by under 1% -- is to some extent paying the price for arrogance. Under its former boss, Lawrence J. Lasser, Putnam nurtured a culture of aggressive overachievers who bred enemies among investors, regulators, and even Putnam's own employees. So when the chips were down, this division of Marsh & McLennan Cos. (MMC) had few friends. Avi Nachmany, head of research at Strategic Insight Mutual Fund Research & Consulting in New York, says: "The personality of Putnam was in large part what got them into trouble and not out."

MFS, a unit of Canada's Sun Life Financial Inc., has benefited from a far cheerier image -- that it was staffed by whiz kids who cared more about the intellectual pursuit of beating the market than the actual money they made off of it. But the SEC claims they allowed $2 billion in investor money to be involved in market timing during a four-year period -- some 5% of the eleven funds involved as of Apr. 30. In all, MFS investors were allegedly stiffed by a total of $175 million. MFS agreed to pay $225 million in fines and restitution -- a flyspeck compared with Sun Life's $1.3 billion in net income last year -- and will reduce fees by $25 million annually for five years. CEO John W. Ballen, who could have been slapped with a lifetime bar, resigned and is prohibited from serving in a senior industry position for three years.

Putnam's alleged misdeeds were far less serious. The trades involved about $25 million. That's tiny compared with MFS, and alleged damage to Putnam shareholders is a fraction of the amount claimed for MFS -- only about $5 million. Yet Putnam has been paraded as an example of bad behavior for the rest of the industry. It first learned of the charges against it through the media a week before Massachusetts Secretary of State William F. Galvin officially filed them, a leak that infuriated Putnam.

Galvin is still probing the company. "Putnam's attitude, even at a late date, was very dismissive," he says. "That corporate attitude confirms our concern we want to make sure we have [fully investigated] before we say O.K., let's settle this matter." Galvin also wants Putnam to acknowledge wrongdoing, which could leave the firm open to damages in shareholder lawsuits. In its settlements, MFS neither admitted nor denied liability. MFS, meanwhile, is getting back to normal and on Feb. 9 picked Robert C. Pozen, a veteran Fidelity Investments exec, as chairman.

Perhaps the outcome simply demonstrates that nice guys don't always finish last. But fund customers have a right to wonder whether Putnam is being unfairly targeted -- or whether the SEC and state regulators have made MFS's punishment fit its transgressions. By Faith Arner


Reviving Keynes
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