Putnam Advisory Co., a subsidiary of Putnam Investments, has been charged with deceiving investors in its role in creating and marketing $3 billion in collateralized debt obligations consisting of subprime and midprime mortgage-backed securities, Secretary of the Commonwealth William F. Galvin said today.
An administrative complaint charges that Putnam allowed Magnetar Capital, a large hedge fund, to be involved in creating and structuring critical aspects of the CDOs, known as Pyxis 2006 and Pyxis 2007. Undisclosed to investors, Magnetar recommended certain collateral for inclusion in the CDOs, and then took a substantial short position on the same collateral, according to the complaint.
"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," the complaint said.
Putnam's collateral management fees for both CDOs totaled more than $8.8 million, Galvin said. The Securities Division is seeking disgorgement of all fees obtained as a result of conduct described in the complaint, a civil administrative fine, as well as a cease and desist order, Galvin said.
The complaint adds that as collateral manager of the two Pyxis CDOs, Putnam represented to investors that it would be an independent advisor, though this was not the case.
"Internal emails sent among Putnam, Magnetar and the structuring banks reveal that Putnam repeatedly violated the trust of investors when it learned of, but failed to disclose, Magnetar's collateral recommendations and purchases of protection on various collateral included ... in Pyxis 2006 and Pyxis 2007," the complaint said. "Additionally, Putnam not only knew of Magnetar's 'hedged equity strategy,' but helped execute it."
A Putnam spokesman could not be immediately reached for comment.
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