State cancels investment firm’s contract

Wednesday, Nov. 12, 2003 | 1:05 a.m.

CARSON CITY -- The state Public Employees Retirement Board voted unanimously today to cancel the $400 million contract with Putnam Investment Advisors, whose employees have been accused by federal and state regularities of mutual fund trading irregularities.

Board Chairman Charles Silvestri said it was "unfortunate" that five or six employees tainted the reputation of Putnam. But he said the board was "fiduciary for 100,000 public employees and 20,000 retires. We have to act for the best interest of the system."

He told Putnam spokesman Richard Harris that "maybe down the road we can do business again." The board took the action at a special telephone conference meeting and accepted the recommendation of system Investment Officer Laura Wallace.

The $400 million will be divided equally between Bank of New York Asset Management and Mellon Capital.

Wallace said she recommended the termination of the contract based on the allegations against Putnam and also because of its substandard performance in handling the investments since March 2002.

She said Putnam came in 2.6 percent below the goal set for the past two and one half years, and "organizational disruption stemming from the recent mutual fund trading scandal is significant."

Harris told the board that Putnam employees engaged in improper trading made $1 million, so "somebody had to be disadvantaged." The company is putting $1 million back into the various accounts.

As a result of the allegations against the firm, Harris said it has lost $14 billion in investments. But it still has $275 billion to invest.

In negotiations with the Securities and Exchange Commission, Harris said "very restrictive" standards will be imposed on Putnam's 5,300 employees. "We think we have dealt with the problem," he told the board.

Wallace said that one of those involved in the improper trading was Omid Kamshad, head of the international stock team that manages the retirement account. She said that Kamshad has been fired.

The retirement system on Oct. 24 suspended Putnam from carrying on further trading for the $400 million fund.

Retirement board member Warren Wish said published reports indicate that the management of Putnam was "asleep at the switch" in dealing with these problems.

Harris said the company became aware of the trading in 2000 but it was not against the law. He said the employees were told to discontinue their activities.

"Looking back they should have been let go," Harris said.

He said since then three groups have been looking at every trade and could not find any others where there may have been misconduct.

Harris also said he was "not pleased" with the investment performance of the retirement fund. He said it invested "in large cap high quality stocks and they have not done well."

The retirement system shows that for the last quarter Putnam earned 6.07 percent while the benchmark was 8.1 percent. For the two and a half years during which the stock market took a dive, Putnam complied a record loss of 5.9 percent compared with the minus 3.6 percent performance level.