Reuters: Regulatory News: UPDATE 1-Massachusetts enforcer: Putnam deceived clients on CDOs

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UPDATE 1-Massachusetts enforcer: Putnam deceived clients on CDOs Oct 17th 2012, 19:48 Wed Oct 17, 2012 3:48pm EDT BOSTON Oct 17 (Reuters) - Massachusetts' securities regulator charged on Wednesday that mutual fund company Putnam Investments deceived clients in creating and marketing $3 billion worth of collateralized debt obligations. Secretary of the Commonwealth William Galvin said the Boston-based company's Putnam Advisory Co allowed hedge fund, Magnetar Capital, to help structure investment products that ultimately failed without telling clients what was in them or that Magnetar was betting that their value would fall. When the Pyxis 2006 and Pyxis 2007 CDOs defaulted, investors lost tens of millions of dollars but Magnetar had earned $67 million and Putnam walked away with $8 million, Galvin said in an administrative complaint. Galvin is seeking disgorgement of the fees Putnam earned and unspecified penalties. The deal that allowed the hedge fund to help structure the CDOs was brokered by one of Magnetar's senior portfolio managers who had previously worked at Putnam, the complaint said. Magnetar Capital, which oversees roughly $9.3 billion in investments, helped select the mortgage loans that were the collateral for the CDOs and then bet against them. But Putnam failed to tell its investors about any of this, Galvin said. "Magnetar benefited substantially from the widespread downgrades of the subprime assets in the Pyxis CDOs, and reaped an exorbitant net gain of approximately $67 million on its equity investments and aggressive short positions tied to both Pyxis CDOs," Galvin said. Putnam spokesman Jon Goldstein said the company "vehemently denies the allegations in the administrative action filed today by the Massachusetts Securities Division and will fight them vigorously." Magnetar said it is not a party to the Massachusetts Securities Division's complaint against Putnam Advisory Co and that it had no responsibility for either the marketing of the relevant CDOs or the disclosures at issue in the case. State and federal regulators have been aggressively pursuing CDO cases and several large banks including Citigroup and Goldman Sachs have settled charges related to how they constructed and marketed these instruments. Link this Share this Digg this Email Reprints

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