Original Article: http://dartreview.com/archives/2008/04/21/blowing_the_whistle_on_ed_haldeman.php

Blowing the Whistle on Ed Haldeman

Monday, April 21, 2008

Editor’s Note: Below, the reader will encounter a story of corruption, ethical lapses, and corporate malfeasance. This is alleged to have occurred under the watchful eye of Charles “Ed” Haldeman, Chairman of Dartmouth’s Board of Trustees.

Haldeman the Reformer

In 2003, when Haldeman took over as CEO of the Boston-based mutual funds firm Putnam Investments, promoted up from head of investments—or Chief Investment Officer (CIO)—the company was emerging from a major scandal. Putnam was the first company among many funds firms to face investigations, penalties, and restitution for an activity known as market timing. Various forms of market timing exist; in Putnam’s case, it involved the rapid trading of shares by preferred investors. Since market timing is banned by Putnam’s prospectus, these activities amounted to fraud.

Many believe that Haldeman steered Putnam away from such unethical behavior: in a 2004 statement to the press, he announced his intention “to reflect our commitment to put these matters behind us and continue to move forward as a firm focusing on rebuilding investor confidence and delivering consistent, dependable, superior investment performance over time.” That same year, Haldeman donated $10 million to Dartmouth College to open the Haldeman Center, which houses Dartmouth’s Ethics Institute.

At Putnam, Haldeman pushed through a series of reforms in the name of good governance. Haldeman has used his reputation as Putnam’s ethical reformer to spearhead similar efforts at Dartmouth. As Chairman of the Dartmouth Board, he has overseen the controversial board-packing initiative at the College. His initiative seeks to undo a 1891 agreement between the College and its alumni that established parity between elected and appointed Board members. Under Haldeman’s reform, eight more appointed trustee positions would be added to the Board, resulting in sixteen total appointed positions, while the number of elected trustees would remain at its current level of eight.

Like the Dartmouth board packing controversy, the Putnam scandal will be judged in a court of law. Putnam is being sued in a US District court in Maryland according to the case’s consolidated federal complaint, filed in September 2004. Both lawsuits­—Putnam’s and Dartmouth’s—are currently in discovery periods, and in both cases, a picture is emerging that cuts into Haldeman’s image as the ethical reformer. The Dartmouth Review has received information that the scandal surrounding the Putnam class action lawsuit­­—involving market timing and fraud—allegedly continued under the watchful eye of Haldeman, the same man who is leading the controversial reforms at Dartmouth.

Blowing the Whistle

Peter Scannell, a resident of Weymouth, Massachusetts, recently contacted The Dartmouth Review about Haldeman’s alleged contemporaneous knowledge of Putnam’s market timing scandal.

— Peter Scannell: Blowing the whistle and not done yet —

Just a few years after his arrival at Putnam, Scannell blew the whistle on Putnam Investments. The New York Times reported, “Peter T. Scannell described how he had tried to turn over evidence of improper trading practices at Putnam but was ignored by the Securities and Exchange Commission.” The USA Today adds, “Scannell blew the whistle to the Securities and Exchange Commission, which didn’t act, and then to Massachusetts regulators, who did.”

Massachusets’ security regulator, Matthew Nestor, noted that the investigation “would not have started without him...We owe him a debt of gratitude.” Nestor told Boston Magazine that upon meeting Scannell, he, “wasn’t nervous. He wasn’t agitated...I knew he was right.”

As a result of Scannell’s efforts, the largest securities investigation of mutual funds companies ever undertaken by regulators was launched. This earned Scannell a nod in USA Today as one of America’s most influential people of 2003, where Scannell was hailed as a hero for his efforts. He has also testified before the Senate Committee on Governmental Affairs on January 27, 2004.

As part of his ongoing investigation of Putnam, Scannell now alleges that Haldeman was aware or should have been aware of the market timing by mutual fund managers which, for a space of time, occurred under his command as the company’s CIO. This is the first time that some of these charges are being made public.

Beginnings and Market Timing

Almost immediately after Putnam trained Scannell in the financial services field, Scannell had his first experience with what is called market timing.

Market timing is the rapid trading of shares in and out of Putnam’s body of funds. Eric Zitzewitz, a recent addition to Dartmouth’s economics department, in an interview with the Boston Globe, notes that market timing “is a problem when a fund denies that right to some people and allows it to others.” This preferential treatment of investors is what occurred at Putnam.

These funds are only priced at the close of the market day, so their prices become stale as the market fluctuates the next day. Market timers take advantage of these stale prices to make a profit. A particularly exploitable type of fund is found in the international markets, with stocks traded from companies around the world. In an international fund, the traders can market-time and exploit market inefficiencies that are presented because of time differences, since markets close at different times internationally.

Though market timing is not illegal, allowing market timing in a fund that clearly states it is prohibited in its prospectus, as every Putnam fund prospectus included at the time of the scandal, is ultimately fraud.

Since market timing is strictly prohibited in Putnam’s funds, the company violated its fiduciary duty to its shareholders and their investments.

Shocked to see these dubious transactions occur at Putnam, Scannell first went to supervisors in his department and quickly learned, to his disappointment, that “discussions about market timing were met with deaf ears,” as he told the Senate Committee on Governmental Affairs.

When he was compiling his spreadsheets and documents, all evidence that market timing occurred at Putnam, Scannell recalls that he “was in very deep and I remember discussing this with my brother Jay who is an attorney with the Quincy District Court. He said I better be very careful that I don’t get myself killed. I told him he was dramatizing,” as he testified before the Senate Committee on Governmental Affairs.

Chief Investment Officer Haldeman

As Scannell was gathering information in his cubicle and the scandal was reaching its peak, Haldeman joined Putnam as the co-head of investments, or co-Chief Investment Officer. Previously, Haldeman was the CEO of Delaware Investments. In October 2002, when Haldeman joined Putnam, the market timing activities were escalating. As CIO, it became Haldeman’s responsibility to oversee all investment operations.

— Haldeman staring down a worried man. —

Scannell said it was rumored that Haldeman would be replacing the then CEO of Putnam, Lawrence Lasser; Scannell alleges that Lasser, not pleased with the prospect of being ousted, made sure that Haldeman was exposed to what he, Lasser, knew. According to the federal court complaint, Lasser certainly knew about the market timing activities of influential investors as early as 2000. Tim Ferguson, then CIO, directly informed Lasser of market timing activities, but Lasser did nothing to stop it, according to the federal complaint. Instead, as the Boston Business Journal reported, Ferguson was “removed from his post as chief investment strategist” in 2002.

Two men replaced Ferguson, according to the Journal: “Lasser named as Ferguson’s replacements Steve Oristaglio, who had been deputy head of investments, and Ed Haldeman, former chief executive of Lincoln National Corp.’s money management business.” Haldeman and Oristaglio reported directly to Lasser.

Ferguson’s information about market timing, Scannell alleges, was shared with Ed Haldeman, and the activities continued to occur after Ferguson was removed from his post as Chief Information Officer.

Lasser may have been the one to take the fall for Putnam’s unethical practices, but he wasn’t the only one who knew about them. According to the federal complaint, senior managers knew too. One of these senior officials, when confronted with having allowed these market timing abuses to occur, told those who confronted him, “Listen, it isn’t CRIMINAL,” according to Scannell’s testimony before the Senate Committee on Governmental Affairs.

Scannell discovered internal documents that confirmed that Putnam was giving preferential treatment to certain market timers, like the Boilermakers, a group of union members who were influential investors at Putnam. In addition, Scannell had documents showing how ordinary shareholders, long-term mom-and-pop investors who had entrusted their money to Putnam, were getting hurt as a result of market timing.

It became clear to Scannell that senior managers would not stop their unethical behavior unless a regulator stepped in. Scannell was now prepared to contact the SEC, believing his research and evidence were compelling enough to warrant SEC action.

In mid January 2003, Scannell compiled his anthology of abuses and printed the classified internal documents that were technically restricted. The day before, he told his supervisor that he would no longer conduct market timed transactions. Scannell told the Senate Committee on Governmental Affairs that the supervisor “responded very seriously and told me I had to do what I had to do, but that I should be very careful.”

Paying the Price

That was January 31, 2003, the same day that then CEO Lasser sold approximately one third of his Marsh & McLennan stock (MMC is Putnam’s parent company) or 48,000 shares. Two days later, February 2, Scannell was sitting in his car, parked in a church parking lot, finishing a coffee before he headed into the church. It was a stormy night, with sleet and snow. As he was finishing up his coffee, Scannell was yanked out of his car and beaten.

Scannell wrote in his report to the Senate Committee on Governmental Affairs, “As I looked up I could see a large burley man with a full beard, New York Yankees cap and grey sweatshirt that had Boilermakers Local 5 emblazoned across the chest area in large bold letters. This was happening in split seconds when I felt something smashing down on my head while he was strangely talking very loud but furious. He said I better “shut the f--- up” and repeated this and some reference to my working at Putnam a number of times while smashing my head and my left hand, which instinctively I was using to shield my head, repeatedly with what the police told me later was a brick.”

The next thing Scannell remembers is waking up shaking uncontrollably as a police officer turned the engine of his car off and an EMT official tried to ask him questions. There was blood running down the driver’s side door and the upholstery of the door was gashed. For an hour before the ambulance arrived, Scannell had been hanging out of the driver’s seat, held in place by his seat belt.

Because of the attack, Scannell was forced to step away from Putnam.

Boilermakers connection

One group of influential investors in particular was making a killing with market timing: the Boilermakers union plan. According to the federal complaint, the Boilermakers plan had a number of known individual market timers and represented a union of about one thousand people. According to the federal complaint, the fund which they market timed between January 2000 and September 2003 was called the International Voyager’s Fund, one of Putnam’s best performing funds.

Scannell had created a spread sheet of the Boilermakers’ market timing activities, mapped their profits, and e-mailed senior managers, who never acknowledged his e-mails, according to his testimony before the Senate Committee on Governmental Affairs.

At the time, the Boston Globe reported, “A few days after Peter Scannell confronted his supervisor at Putnam Investments about trading abuses, he was dragged from his car and beaten with a brick by a man who ordered him to keep his mouth shut.”

“It was a response to my decision to come forward,” Scannell begins, “it was a threat about what types of things would happen again if I continued to go forward.”

The Next Step

Scannell sought out a securities lawyer from the firm Dwyer and Collora, a high profile securities law firm that has a specialty in securities fraud. Scannel worked with his lawyer, Jody Newman, to contact the SEC.

Newman had a personal internal connection at the SEC and was able to convince the regulators there that Scannell’s information consisted of more than just a “tip.” Newman’s first contact with the SEC was at the end of March in 2003. At that point, the SEC specifically requested the names of the funds that were being market timed.

One of them was the International Voyager Fund. This fund is a five star flagship fund worth over two billion dollars, with a valuable history of positive returns—an important measure of any fund’s success. Additionally, it is particularly vulnerable to market timing as it includes stocks from international companies, allowing the time zone differentials to be exploited for a profit.

On April 28, 2003, the SEC met with Scannell and Newman. According to Scannell’s testimony, the SEC had been provided, “with internal documents, market timers account numbers, emails, and [Scannell’s] experience at Putnam Investments.” They said they would follow up with Scannell after the meeting. It was months before they did. According to Scannell’s testimony, “For a number of months there was no communication from the SEC. I was still aware that market timing continued at Putnam...and could not believe that the SEC was not acting on what I believed any regulator would consider being compelling evidence.”

A Cover Up?

Instead, Scannell says Putnam was warned about a possible investigation.

According to the SEC’s Edgar system for filing official documents, two days later, on April 30, 2003 Putnam completed the extraordinary and costly undertaking of changing several of its fund names. Putnam changed the names of the funds that Scannell had given the SEC. Strategies like this have been used before to hide a firm’s history from shareholders.

On April 30th, 2003, Haldeman was the Chief Investment Officer for Putnam Investments and his job and duty involved overseeing all investment operations of the company. Scannell alleges that these name changes occurred under the head of investments, Haldeman; certainly, Haldeman did not stop the name changes—changes which Scannell alleges were a “cover up.”

Typically, a fund’s name is only changed if it somehow changes drastically in composition or merges with another fund. A number of these funds, including the International Voyager Fund, only changed in name. The federal court complaint and the Edgar system indicate that the fund was renamed the Putnam International Capitals Opportunities Fund. According to press archive resources, like GoogleNews, the last mention of Putnam’s “International Voyager Fund” in the press was on March 22, 2003. It is possible, then, that the name changing began around late March 2003.

According to Scannell, the process of changing the funds’ names started when he gave the fund names to the SEC and was completed officially on April 30, 2003, just more than a month after Scannell contacted the Boston office of the SEC. Scannell’s lawyer, according to his testimony, contacted an SEC lawyer on March 26th, 2003.

Scannell suggests a possible reason behind the changing of the fund names: “to overtly dupe and confuse the traditional investor in case unanticipated negative regulatory examination would occur.” His claim can neither be corroborated in the federal court complaint nor in his former testimonials as this is the first time he is going public with his suspicions.

Haldeman takes the reins as CEO

Chairman Haldeman had been hired as Putnam’s head of investments in October of 2002. A year later, Putnam’s name exploded across headlines in the national news media in October 2003. Several weeks later, Haldeman became CEO of Putnam Investments.

In the press, evidence emerged confirming Scannell’s accusations: for a number of years Putnam had fraudulently allowed the practice of market timing for some of its select and influential investors. According to both Scannell’s testimony and the federal complaint, Putnam’s senior management knew of market timing by mutual fund managers but did nothing to stop it. The only senior official who attempted to halt the market timing, according to the federal complaint, was Tim Ferguson. Ferguson tried to stop the unethical activities but was removed from his position as CIO. His successor was Haldeman, who is not mentioned in the court complaint as attempting to stop the market timing.

For several weeks, Putnam’s senior management tried to get ahead of the issue while issuing daily denials, but overwhelming evidence to the contrary was reported in the Wall Street Journal, USA Today, and the Boston Globe. Eventually, Putnam’s parent company, Marsh & McLennan, forced CEO Lasser to resign. Thereafter, Haldeman was appointed as Putnam’s new CEO in 2003.

In his new position as CEO, Haldeman not only vowed to steer the company out of its ethical morass, but he swore to change the way the company did business. Though Haldeman is the supposed ethical reformer at Putnam, Haldeman did not want to discuss his legacy with the Review over the phone.

Haldeman evades the Review’s questions

When the Review attempted to speak to Haldeman on the phone for comment on Scannell’s allegations, Haldeman refused. When the Review identified itself on the phone, Haldeman hesitated and initially did not speak. When he did speak, he reacted by saying, “Oh...Yeah, I didn’t realize—At Putnam I really don’t give out interviews that are going to be published in magazines and things like that, I try not to do that, I try to keep a lower profile.”

Now that questions of unethical behavior have been raised, Haldeman has changed his position on speaking to the press. When Haldeman took over as CEO of Putnam, when he was being hailed as an ethical reformer, his name, quotations, and interviews appeared in numerous newspapers and magazines—from the New York Times, to CNN, to the Wall Street Journal, to Time Magazine, and on and on. At the time he took over as CEO, he is quoted in the press saying that the “proper response” to ethical lapses “is to tell the client about the mistake and make restitution.” He articulated a “zero tolerance” policy for gaps in accountability and responsibility. In response to the restitution and penalties the SEC eventually imposed on Putnam, Haldeman commented, “We are confident that the steps we are taking will make Putnam a better business with a strengthened ability to serve investors and clients.”

When the Review asked him about the double standard he applies to the publications he gives interviews to, Haldeman again stammered. The Review noted that Haldeman tends to give out interviews to the Daily Dartmouth; when we went on to ask why he is refusing an interview with the Review, Haldeman noted that he does not like answering questions that interfere with his Dartmouth life and his Putnam life. He then went on to say that he will not answer the Review’s questions about Putnam because they are “interacting with my professional life and my Dartmouth life, and they’re sort of separate.”

“Sort of.” Haldeman donated ten million dollars for the Haldeman Center at Dartmouth; the Haldeman Center, home of the Ethics Institute. Now that ethical questions are being asked about Haldeman’s tenure at Putnam, the irony of his opening a center devoted in part to the study of ethics is not lost. When asked about opening the Haldeman Center, which houses the Ethics Institute, he said, “I think I ought not to answer about anything like this.”

Given that Haldeman did not want to answer questions about Putnam, the Review decided to ask Dartmouth-related questions instead, as Haldeman responds to those types of questions for the Daily Dartmouth. When the Review then asked if we could ask an exclusively Dartmouth-related question, Haldeman responded, “I’m trying to be polite, but I really don’t think that this is what I want to do, ok?” When the Review pressed on, “So no Dartmouth related questions then?” Haldeman responded “No.”

Putnam’s Class Action suit in Maryland

Now that Putnam is facing a class action lawsuit in a US District court in Maryland, Haldeman is reticent.

The Maryland suit seeks to recover damages for long term shareholders whose investments were diluted as market timers were making fortunes. The suit is currently undergoing a discovery period in which Haldeman’s exact involvement in the market timing scandal may be explored. According to the federal complaint, one issue that will be litigated in court is Lasser’s severance package which amounted to seventy eight million dollars. The plaintiffs’ lawyers take issue with the fact that Putnam’s trustees did nothing to capture this money and divert it to Putnam’s shareholders, who were losing money as a result of the market timing that Lasser did not stop. According to the federal court complaint, “No Trustee could claim to be ignorant of the market timing and late trading scandal since September 3, 2003.” Haldeman joined the Board as CEO one month later, and the composition of the Board remained intact. The complaint goes on, “Despite that, however, the Trustees have failed to take any action against...persons responsible for causing harm to the Funds by market timing or late trading. To the contrary, almost immediately after Putnam Investment’s settlement with the governmental enforcement agencies [April 8, 2004, according to the SEC’s website], it paid Lawrence Lasser a severance amount of $78 million [June 2004], despite the enormous harm he had brought to the Putnam Funds, and the Trustees failed to do anything to prevent that payment and capture the payment for the benefit of the Putnam Funds.” As CEO, Haldeman sat on the Board of Trustees beginning in October 2003.

Haldeman: A Man of Integrity?

When asked about Haldeman’s reputation as the one who cleaned Putnam up after its fall, Scannell is unconvinced. Scannell points out that Haldeman joined Putnam in 2002 in the heat of market timing activities.

Scannell alleges that Haldeman “certainly should have known all about the market timing and he did nothing to stop it.” Additionally, Scannell believes that Haldeman was, at the very least, aware of the changing of fund names, which Scannell refers to as a cover up.

Furthermore, Scannell alleges that Haldeman’s efforts to reform Putnam occurred only after the SEC was impelled to investigate the scandal. Scannell has found no evidence to suggest that Haldeman acted to stop the unethical behavior prior to the investigation.

Scannell has suggested there is even more to this story, and The Dartmouth Review is following up on other leads connected to Haldeman. Recently, Scannell met with the U.S. Attorneys Office in Boston to discuss the possibility of investigating the alleged Putnam cover up.

The Future of Dartmouth

Haldeman has the reputation of a man of high integrity; most professors think so, as do some of his colleagues on the Board. Some members of the Board, however, think that though Haldeman has the reputation of being a man of upstanding character, the way he is handling the “board packing” incident would cut against a reputation for fairness and decency, as do these new allegations about his tenure at Putnam.

When Haldeman announced his intention to change the structure of Dartmouth’s Board, he said, “Given the divisiveness of recent elections, we did not believe that having more [trustee] elections would be good for Dartmouth.” He then instituted his reforms under the name of “good governance,” and he continues to bank on his reputation as an ethical reformer. “

Haldeman assures alumni that the 117 year tradition of maintaining equal numbers of elected and appointed trustees on the board—an agreement established in 1891 and upheld since—“doesn’t promise parity.”

He tells the Dartmouth community, “The Board’s 1891 resolution was simply a non-binding resolution of the Board. It’s one of many resolutions that have been adopted over the years regarding governance, and one the Board is free to amend, in fact is required to amend, if it determines that it’s in the best interest of the College to do so.”

He defends himself, “Let’s be clear: in making these changes, the Board reaffirmed its commitment to alumni democracy and alumni trustee elections.”

Is Haldeman now reforming Dartmouth in the same way he governed and “reformed” Putnam?

As Putnam’s CIO, then CEO Haldeman and Board member, Haldeman was obliged to govern, protect, and grow the financial interests and futures of all his shareholders. According to Putnam’s Code of Ethics, “It is the personal responsibility of every Putnam employee to avoid any conduct that could create conflict, or even the appearance of conflict, with our clients, or to do anything that could damage or erode the trust our clients place in Putnam or its employees.” According to the prospectus of Putnam’s International Capital Opportunities Fund (previously the International Voyager Fund), market timing violates the Code of Ethics: “the exchange privilege is not a vehicle for short term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders.”

Today, more than a few students and alumni of Dartmouth College expect Haldeman to uphold his commitment to genuine ethical reform. Like Putnam’s shareholders, Dartmouth’s alumni and students are being let down by the very man meant to protect their interests. And like Putnam’s shareholders, the alumni of the College are taking the issue to court.