Alliance Capital Management forced two top officials out of the company Monday as fallout related to the ongoing mutual fund scandals entered a new week. Meanwhile, Putnam Investments began an advertising campaign aimed at damage control by taking out full-page ads in the New York Times and Wall Street Journal.
John D. Carifa resigned as president, chief operating officer and director of Alliance Capital and chairman of the board of its mutual funds.
Michael J. Laughlin stepped down as the chairman of the company’s mutual fund distribution unit.
The officials were urged to resign “...because they had both senior and direct responsibility over the firm’s mutual fund unit which, as previously reported, allowed inappropriate market timing transactions, some of which had an adverse impact on mutual fund shareholders,” Alliance Capital CEO Lewis A. Sanders said in a press release.
“Our supervisors’ utmost obligation to protect the best interests of our clients cannot be compromised at any level of the firm or for any reason,” he added.
Alliance Capital’s responsibility for improper mutual fund trading could likely result in state and federal charges against the management firm.
Last week Alliance said it had uncovered instances of market timing at the company and that it hoped to reach a resolution with the U.S. Securities and Exchange Commission and the New York Attorney General’s office.
Any settlement would likely include sanctions, penalties and restitution to mutual fund shareholders.
Controlling the damages
Putnam Investments, the fifth-largest U.S. mutual fund company, unveiled an advertising campaign intended to control damages stemming from the fund scandal. In full-page ads placed in the New York Times and Wall Street Journal, Putnam’s top executives pledged to “restore accountability, integrity, and confidence,” as well as to review its compliance system.
The Putnam ad, headlined “We’re changing Putnam Investments,” claimed a new management team is “actively addressing” the issue of market timing.
The letter was signed by Charles Haldeman, Putnam’s president and chief executive, A.J.C. Smith, the firm’s chairman, and Steven Spiegel, its vice chairman.
Regulators charged Putnam violated civil securities laws by allegedly engaged in rapid trading of mutual funds to profit from price lags such as those that may occur across time zones. The activity is at the center of a sweeping investigation by federal and state regulators into the industry, which has already resulted in several high-level resignations.
InsertArt(2065942)On Nov. 3, Putnam’s parent company, insurer Marsh & McLennan Cos., announced that Putnam President and Chief Executive Lawrence Lasser had resigned.
Federal and Massachusetts regulators have accused Putnam of letting some clients and managers engage in market timing, a practice Putnam publicly prohibits. Two Putnam managers have also been accused of securities fraud.
Investors pulled $4.43 billion from Putnam — 5 percent of its assets — in the week ended Wednesday, according to AMG Data Services of Arcata, California.
Playing it safe
The scandal has led even companies not implicated to buy ad space to reassure investors.
Last Thursday, Edward Jones, a major mutual funds distributor, bought a full-page ad in the Wall Street Journal to make six recommendations to the Securities and Exchange Commission to strengthen regulations for the industry.
Jones, which serves 5.3 million investors, said in the ad it “cannot simply take the role of a spectator as events in this vital sector of our capital markets unfold.”
Industry critics lauded the move. “If I were an untainted firm, I would increase advertising but not mention the scandal,” said shareholder rights advocate Mercer Bullard.
Investment manager T. Rowe Price Group Inc., cited by Bullard as a trustworthy company, said its television ads in the United States over the weekend were not in response to the ongoing crisis.
Market-timing is the use of quick trades that capitalize on flaws in the way mutual funds are priced. The practice is not illegal but most funds prohibit it because it skims profits from longer-term shareholders.
Late trading is an illegal practice where a trader buys shares of a fund after the market closes at 4 p.m. ET, but at the market’s closing price. The trader then sells the shares once the market opens the next day, benefiting from any after-hours news that moves stock prices.
New York Attorney General Eliot Spitzer has likened late trading to betting on a horse race after it has ended.
Alliance Capital has said it would make full restitution to investors for “the adverse effects that market timing had on the firm’s mutual funds” but that may not be enough to satisfy regulators.
Hundreds of subpoenas have been issued by federal, state and industry regulators, with civil charges filed against Putnam Investments and employees at Prudential Securities. Individual employees at Bank of America, Millennium Partners and Fred Alger & Co. have also been charged.
The Associated Press and Reuters contributed to this report.