US regulators also accused nearly 450 brokerage firms of overcharging investors for mutual fund purchases and said tens of million of dollars of refunds may be necessary.
The US Securities and Exchange Commission told lawmakers at a Washington hearing on Monday that 10% of top mutual fund companies may have been involved in illegal late trading.
Once seen as a safe haven for ‘mum and dad’ investors, the mutual fund industry has become “the world’s largest skimming operation,” said Senator Peter Fitzgerald, chairman of the Senate Subcommittee on Financial Management.
Lawrence Lasser, who built Putnam Investments into the fifth largest US mutual fund company, became the biggest casualty of the deepening probe into the funds industry when he was ousted by Putnam’s corporate parent, the insurance broker Marsh & McLennan Cos. Inc.
“This whole episode is going to have a significant effect on the way funds are governed by the time all is said and done”
The maelstrom on Monday also claimed the chief of the SEC’s office in Boston, Juan Marcelino, who will step aside. A Putnam whistle-blower said he was ignored by the agency for months until state regulators took note and moved to filed charges.
The SEC and the state of Massachusetts plan to file fraud charges against former Prudential Securities brokers, a spokesman for the state’s top securities regulator, Secretary of the Commonwealth William Galvin, said on Monday.
Putnam’s Lasser is the most senior executive to lose his job as regulators investigate the $7 trillion US mutual fund industry. Last week, state pension plans pulled more than $4.3 billion out of Putnam funds after the company was charged with securities fraud.
Putnam, which has denied any wrongdoing, is struggling to halt customer defections.
Federal regulators on Monday painted a picture of widespread trading abuses in the mutual fund industry in presenting Congress with findings from a sweeping search of securities industry documents.
The SEC said more than a quarter of top US brokerage firms have let customers illegally trade mutual fund shares after hours at prices set at the close of trading.
Eric Zitzewitz, an assistant professor of economics at Stanford Graduate School of Business, said, “This whole episode is going to have a significant effect on the way funds are governed by the time all is said and done,” Zitzewitz said.