U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20373 / November 27, 2007
SEC v. Karnig H. Durgarian, Jr., Donald F. McCracken, Ronald B. Hogan, Virginia A. Papa, Kevin F. Crain, and Sandra G. Childs (United States District Court for the District of Massachusetts, Civil Action No. 05-12618-NMG)
Court Dismisses SEC Action Against Three of Six Former Putnam Fiduciary Trust Company Executives; Court Denies Dismissal Sought by Three Other Defendants
The Securities and Exchange Commission announced today that on November 13, 2007, the United States District Court for the District of Massachusetts entered a judgment dismissing a civil fraud action against three former executives of Putnam Fiduciary Trust Company (PFTC), a Boston-based registered transfer agent. The action, which alleged that six former PFTC executives engaged in a scheme beginning in January 2001 by which the defendants defrauded a defined contribution plan client and group of Putnam mutual funds of approximately $4 million, was dismissed as to defendants Virginia Papa, of Newton, Massachusetts, a former managing director and director of defined contribution servicing; Sandra Childs, of Duxbury, Massachusetts, a former managing director who had overall responsibility for PFTC's compliance department; and Kevin Crain, of Princeton, New Jersey, a managing director who had responsibility for PFTC's plan administration unit. The Court found that the Commission's complaint did not allege sufficient conduct by those three parties to sustain fraud claims against them.
Simultaneously, the Court denied motions to dismiss by three other defendants: Karnig Durgarian, of Hopkinton, Massachusetts, a former senior managing director and chief of operations for PFTC, as well as principal executive officer of certain Putnam mutual funds from 2002 through 2004; Donald McCracken, of Melrose, Massachusetts, a former managing director and head of global operations services for PFTC; and Ronald Hogan, of Saugus, Massachusetts, a former vice-president who had responsibility for new business implementation at PFTC.
The Commission's Complaint, filed on December 30, 2005, alleges that the defendants' misconduct arose out of PFTC's one-day delay in investing certain assets of a defined contribution client, Cardinal Health, Inc., in January 2001. The markets rose steeply on the missed day, causing Cardinal Health's defined contribution plan to miss out on nearly $4 million of market gains. According to the Complaint, rather than inform Cardinal Health of the one-day delay and the missed trading gain, the defendants decided to improperly shift approximately $3 million of the costs of the delay to shareholders of certain Putnam mutual funds through deception, illegal trade reversals, and accounting machinations. The Complaint also alleges that the defendants improperly allowed Cardinal Health's defined contribution plan to bear approximately $1 million of the loss without disclosing to Cardinal Heath that they had done so. The Complaint further alleges that certain defendants also took steps to cover-up the wrongful conduct and, as a result, the conduct was not discovered until January 2004.
The Complaint alleges that through their fraudulent conduct, defendants violated Section 17(a) of the Securities Act of 1933 and violated and/or aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934. The complaint further alleges that Durgarian also violated Sections 34(b) and 37 of the Investment Company Act of 1940. The Commission is seeking injunctive relief and civil monetary penalties.
For more information, see Litigation Release No. 19517 (January 3, 2006).