SEC Orders Putnam to Pay $1 Million Penalty, Suspends and Fines Former Portfolio Manager for Prearranged Cross-Trades
Sept. 27, 2018
File No. 3-18844
Boston, MA, September 27, 2018 - The Securities and Exchange Commission entered an order today finding that a Boston-based investment adviser and one of its former portfolio managers facilitated dozens of prearranged cross-trades between advisory client accounts in a manner that disadvantaged some of the adviser’s clients.
According to the SEC’s order, Zachary Harrison, a former portfolio manager for Putnam Investment Management, LLC, prearranged trades with brokerage firms in violation of the rules governing cross-trades. The order found that, in violation of SEC rules governing the trading of securities from one client advisory account to another, Harrison prearranged with broker-dealers to temporarily sell residential mortgage-backed securities and repurchase them at a small mark-up, usually the next business day. The SEC’s order found that Harrison often signaled his intention to repurchase the securities the next day by referring to them as “core positions” or “core holdings” in his communications about the trade. By executing the trades at the securities’ bid price, instead of the midpoint between the bid and the ask price as required by SEC rules, Harrison’s trading had the effect of benefitting the client who purchased the crossed bond, to the detriment of the client selling the bond. The SEC order also found that Putnam’s training and monitoring procedures related to cross-trading were inadequate, and that it failed reasonably to supervise Harrison.
The SEC’s order found that Putnam violated the antifraud provision of Section 206(2) of the Investment Advisers Act of 1940, as well as Advisers Act Sections 206(4), and 207, and Advisers Act Rule 206(4)-7, and that Putnam failed to supervise Harrison within the meaning of Advisers Act Section 203(e)(6). In addition, the SEC’s order found that Putnam and Harrison caused Putnam’s clients to violate Sections 17(a)(1) and (2) of the Investment Company Act of 1940. The SEC’s order also found that Harrison caused Putnam’s violations of Section 206(2) of the Advisers Act, and willfully caused to be included in a report filed with the Commission under the Advisers Act a statement which was false or misleading with respect to a material fact Without admitting or denying the findings, Putnam agreed to reimburse approximately $1,095,000 to its harmed clients and to pay a $1 million penalty, and Harrison agreed to pay a $50,000 penalty and to a nine-month suspension from the securities industry.
The SEC’s investigation was conducted by Andrew Feller and Colin Forbes of the Complex Financial Instruments Unit, with the assistance of Joshua Grinspoon and Trial Unit attorney Deena Bernstein, and supervised by Celia Moore.