Putnam's Lasser Ousted Amid Fund Trading Probe (Update6)

2003-11-03 16:30 (New York)

(Adds closing share price; SEC chairman's comment in 15th

paragraph; SEC resignation in Boston in 17th paragraph.)

Nov. 3 (Bloomberg) -- Putnam Investments ousted Chief

Executive Officer Lawrence Lasser, one of the mutual fund

industry's highest-paid and longest-serving executives, after the

company was charged with fraud for improper fund trading.

Marsh & McLennan Cos., Putnam's parent, named Charles

Haldeman, 55, to replace Lasser as head of the fifth-largest U.S.

fund manager, the company said in a statement. Lasser, 61, who was

paid $163 million during the past six years, will leave

immediately. His departure followed the withdrawal last week of

more than $4 billion by pension clients.

Lasser, who led Boston-based Putnam for 18 years, is the

highest-ranking manager to lose his job in the biggest inquiry of

the fund industry since the writing of the Investment Company Act

in 1940. Strong Capital Management Inc. yesterday said founder

Richard Strong stepped down as chairman of its mutual funds group.

In all, more than 30 people have been suspended or fired since New

York Attorney General Eliot Spitzer started the probe in September.

``This is a move they had to make,'' said Wayne Bopp, who

helps manage $31 billion at Fifth Third Bancorp in Cincinnati,

which holds about 3 million shares of Marsh & McLennan after

trimming its stake during the past two weeks.

Since the allegations of short-term trading by Putnam managers

emerged on Oct. 28, pension clients in states including

Massachusetts and Iowa have pulled their accounts from Putnam.

``To lose that many high-profile fund accounts in such a short

time is probably unparalleled,'' said Burt Greenwald, a fund

industry consultant in Philadelphia.

Management Changes

On Oct. 28, the Securities and Exchange Commission said Putnam

failed to properly enforce its code of ethics to prevent two former

money managers from taking advantage of inside knowledge about the

international funds they oversaw to generate quick profits for

themselves at the expense of their customers.

As part of a management overhaul, Marsh & McLennan said Steven

Spiegel, 58, Putman's senior managing director, will be vice

chairman, and A.J.C. Smith, 69, Marsh & McLennan's former chairman

and CEO, will return as chairman of Putnam.

New York-based Marsh & McLennan also said Barry Barbash, the

former chief mutual fund watchdog at the Securities and Exchange

Commission, will conduct an independent review of Putnam's policies

and controls.

``This is a step in the right direction,'' said Jeff Thompson,

an analyst at Keefe Bruyette & Woods in Hartford, Connecticut, who

has a ``market perform'' rating on Marsh & McLennan and holds no

shares of the company. ``It's still going to take a while to get

things back on track,'' he said.

Shares of Marsh & McLennan, which had lost 14 percent since

Massachusetts announced its investigation on Sept. 16, rose $2.13,

or 5 percent, to $44.88 in New York Stock Exchange composite

trading.

Lasser's Contract

Marsh & McLennan spokeswoman Barbara Perlmutter said the

company was reviewing terms of Lasser's contract. She declined to

be more specific about how much more Lasser may receive after

leaving. Under 1997 and 2000 contracts, Lasser may be owed more

than $30 million, according to company filings.

Marsh & McLennan Chairman Jeffrey Greenberg is meeting with

Putnam employees and clients in Boston, and isn't available for

comment, Perlmutter said. Lasser's cash compensation was about five

times what Greenberg earned during the past six years, according to

company filings. During the third quarter, Putnam contributed 23

percent of Marsh & McLennan's profit, down from 44 percent in 1999.

Greenberg today apologized to investors for the improper

trading at Putnam in a statement. ``The kind of conduct that has

occurred has no place at Putnam,'' he said.

SEC's Donaldson

SEC Chairman William Donaldson said the management change was

appropriate. ``It was on his watch that some of these things

happened, and he's taking responsibility for it,'' Donaldson said

after a speech at the University of Connecticut.

The fraud charges have tarnished one of the oldest names in

the fund business. Putnam was started in 1937 by a descendent of

Massachusetts Supreme Court Justice Samuel Putnam, whose 1830

ruling that funds in trust should be managed from the perspective

of a ``prudent man'' helped create the basis for the industry.

The Putnam scandal also claimed another executive today. The

SEC said Juan Marcelino, the head its Boston office, resigned after

criticism that his office failed to follow up on a Putnam

employee's tip in the mutual fund trading scandal. Marcelino, who

first joined the SEC in 1984, stepped down ``to minimize any

further distraction for his staff,'' the SEC said in a statement.

Dartmouth Graduate

Haldeman came to Putnam last October from Lincoln National

Cos., where he was president and CEO of the company's Delaware

Investments unit. A graduate of Dartmouth College with degrees from

Harvard Business School and Harvard Law School, Haldeman has worked

in the investment business for almost 30 years.

Under Lasser, assets at Putnam rose to as much as $422 billion

in March 2000 at the peak of the Internet and technology-led stock

market rally from $20 billion when he took over in 1985. The

company oversaw $272 billion for clients at the end of September.

A day before the fraud charges were filed on Oct. 28, Lasser

apologized to customers in a two-page letter. Four managers,

including the head of international equities, and a retirement plan

had made short-term trades contrary to Putnam policies, Lasser

said. The managers were replaced, creating turmoil on the investing

team that gave investors another reason to depart.

``While we strongly believe that our actions weren't

fraudulent, we recognize the public perception of the facts and the

damage to our reputation,'' he wrote.

Lagging Performance

The alleged wrongdoing at Putnam marks the third time since

1998 that Lasser had to dismiss employees and say he was sorry for

investing mistakes.

From 2000 to 2002, the company's stock funds ranked third

worst among the 25 biggest companies tracked by researchers at

Kanon Bloch Carre in Boston. The sub-par performance was caused by

Putnam's overweighted investments in technology stocks contrary to

prospectuses that said the funds were diversified.

Putnam's Vista fund prospectus in late 1999 said ``because the

fund invests across many sectors, it is less dependent on any

single industry or stock, which may reduce risk.'' At the time,

more than half the fund was invested in two industries --technology

and telecommunications.

After performance dipped, Lasser replaced head of investments

Tim Ferguson in October 2002 with Steve Oristaglio, one of

Ferguson's deputies, and Haldeman, who was today named as Lasser's

replacement. Lasser also changed the heads of research and trading,

and more than a dozen fund managers.

Changing Managers

In 1998, Putnam's biggest bond funds posted losses from

investments in emerging market debt, leading to the departure of

eight fund managers and two heads of fixed-income investing in

under a year. The turnover led to pension fund firings, including

by Massachusetts, which pulled $1.3 billion of bond investments.

Changing personnel has been a fixture during Lasser's tenure

starting in 1986 when the head of international investing, Walter

Oechsle, and 11 people who worked for him resigned to start their

own firm. Lasser sued, charging in an affidavit that the departing

employees were trying to ``cripple or destroy'' Putnam's business.

The suit was settled out of court and the new firm, Oechsle

International Advisors LLC, now has $20 billion under management.

In a 1995 interview with the Boston Globe, Lasser said he was

a tough boss. ``Some people find me difficult to deal with and hard

to understand and, maybe, not likeable,'' he told the newspaper.

``I'm sorry about that but I'll recover.''

Born in 1942, Lasser was the eldest of three sons. His father

owned a garment-making business in New York and the Lasser boys

were raised in Scarsdale, New York, a suburb 22 miles outside of

Manhattan. He missed the radical student movements at the end of

the 1960s after graduating from Antioch College in Ohio in 1965.

Harvard Graduate

Next, while attending Harvard Business School, Lasser combined

his growing business acumen with an interest in contemporary

American art. He and a roommate would fly to Paris to buy prints by

artists like Ellsworth Kelly and sell them back in Boston.

Even as he moved up the ranks at Putnam, Lasser ran an art

gallery on Newbury Street in Boston's Back Bay neighborhood until

1981. Continuing his interest in art, Lasser selected prints by

contemporary artists like Frank Stella and Roy Lichtenstein for

Putnam's offices in downtown Boston's Post Office Square.

In last week's letter to customers, Lasser said he would take

responsibility for recent events at Putnam.

``Having to do so is painful, as the issues involve contradict

everything I have learned from Putnam and contributed to Putnam

over the last 34 years,'' he wrote.

--Aaron Pressman in the Boston newsroom at (1) (617) 338-5822 or

apressman@Bloomberg.net, with reporting by Helen Stock in New York,

Editor: Quinson.