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Rating:Galvin Finds a $3B Skeleton in Putnam's Closet Not Rated 4.0 Email Routing List Email & Route  Print Print
Thursday, October 18, 2012

Galvin Finds a $3B Skeleton in Putnam's Closet

News summary by MFWire's editors

A ghost from Putnam's [profile] past is coming back to haunt Bob Reynolds.

Yesterday Massachusetts Secretary of the Commonwealth William Galvin charged Putnam Investments subsidiary Putnam Advisory Co. with fraud over two $1.5-billion collateralized debt obligations made during the subprime mortgage bubble.

The CDOs, Pyxis ABS CDO 2006-1 Ltd. and Pyxis ABS CDO 2007-1 Ltd., were created by Putnam Advisory with help from hedge fund Magnetar Capital, according to Galvin, and earned Putnam $8.815 million in collateral management fees. Galvin's complaint describes Magnetar using a "hedged equity strategy" with the CDOs, buying equity tranches while shorting other parts of the CDOs. He also notes that Magnetar's co-head of structured credit was terminated by Putnam in 2003 "for excessive trading of growth mutual funds in his personal brokerage account."

"To allow Magnetar to suggest inferior investments with the intent of betting against it deprived other investors of the honesty and fairness they were entitled to," Galvin reportedly said.

Putnam spokesman Jon Goldstein said that the Boston-based mutual fund shop "vehemently denies the allegations in the administrative action filed today by the Massachusetts Securities Division and will fight them vigorously."

The Pyxis 2006 and Pyxis 2007 CDOs were closed in October 2006 and March 2007, well before Reynolds took over Putnam in 2008. Both CDOs defaulted.

Galvin's complaint follows a lawsuit filed in April by Pyxis 2006 CDO investor Intesa Sanpaolo, a Milan-based bank. Intesa sued Putnam, French bank Credit Agricole SA and Magnetar itself.

Bloomberg, the Boston Business Journal, the Boston Globe, the Boston Herald, the Financial Times and Reuters all covered Galvin's charges. 

Edited by: Neil Anderson, Managing Editor

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