Putnam Advisory Co., a unit of the Boston-based money manager, was charged by Massachusetts regulators with deceiving investors in the creation and marketing of mortgage-related products in 2006 and 2007.
William Galvin, the state’s top securities regulator, said the firm allowed Magnetar Capital LLC to recommend collateral for products known as collateralized debt obligations, without telling investors the hedge fund was betting against those securities, according to a statement today from the Massachusetts Secretary of the Commonwealth. The suit seeks the disgorgement of all fees gained from the deals in question and unspecified fines.
“This action stems from my office’s continuing investigations into how banks misled the purchasers of these securitized debt instruments backed by subprime mortgages,” Galvin said in the statement.
JPMorgan Chase & Co. agreed to pay the Securities and Exchange Commission $153.6 million in June 2011 to settle a claim involving collateralized debt obligations, or CDOs, that Magnetar allegedly helped to construct. Goldman Sachs Group Inc. paid $550 million to the SEC in July 2010 to settle a similar claim involving Paulson & Co., John Paulson’s hedge fund.
“The Putnam Advisory Co. vehemently denies the allegations and will fight them vigorously,” Jon Goldstein, a spokesman, said in a telephone interview.
“Magnetar is not a party to the Massachusetts Securities Division’s complaint against Putnam,” Melinda McMullen, a spokeswoman for Evanston, Illinois-based Magnetar, said in an e-mailed statement. “Magnetar had no responsibility for either the marketing of the relevant CDOs or the disclosures at issue in this case.”
Putnam was sued in April by Milan-based bank Intesa Sanpaolo SpA, which invested in the CDO, called Pyxis ABS CDO 2006-1. Intesa also sued Credit Agricole SA, France’s third-biggest bank, and Magnetar.
The suit claims that Credit Agricole induced Intesa to invest in the CDO and told investors the product was based on residential mortgage-backed securities that had been chosen by Putnam when the underlying securities were really selected by Magnetar.
Magnetar told investors in an April 2010 letter it didn’t help banks create CDOs that were “built to fail” on a bet that homeowners with bad credit would default on their loans. The firm offered limited input on the creation of CDOs, and made bets that would pay off if they soured as part of a “market neutral” portfolio designed to profit no matter what happened, Magnetar said in the letter.
Putnam Investments, owned by Montreal-based Power Corp., had $127 billion assets under management as of last month.