Massachusetts Secretary of State William F. Galvin on Wednesday charged a unit of Boston-based Putnam Investments with deceiving investors about $3 billion in investments in mortgage-related securities that went on to lose money.
According to Galvin’s office, Putnam Advisory Co. allowed a prominent Illinois hedge fund, Magnetar Capital, to help select securities for collateralized debt obligations, vehicles made up of risky sliced-up mortgages that imploded in the financial crisis. But Magnetar was in a position to gain if the securities, many of them subprime, defaulted.
Magnetar reaped $67 million on those investments, Galvin alleged, while other investors lost money. Magnetar’s role of betting against the securities was not disclosed to the other investors, Galvin said.
Putnam Advisory denied the allegations and said in a statement that it will “fight them vigorously.” The firm earned $8.8 million in fees for serving as a manager of the CDOs, called Pyxis 2006 and Pyxis 2007.
The Massachusetts Securities Division, which Galvin oversees, has been investigating whether banks and other investment firms misled the purchasers of these types of complex debt instruments during the housing boom in the 2000s.
Galvin’s office is seeking an immediate end to the practice by Putnam Advisory, as well as the repayment of all fees obtained through the CDOs and a fine.
Magnetar, based in Evanston, Ill., was not charged in the state’s complaint. In a statement, the company placed the blame on Putnam for failure to disclose risks to investors.
“Magnetar had no responsibility for either the marketing of the relevant CDOs or the disclosures at issue in this case,’’ the company said. Magnetar denied that it took advantage of investors.
“We stand by our prior statements on these topics, specifically that we did not control the asset-selection process, we were transparent with our counterparties, and our Mortgage CDO investment strategy maintained a market-neutral portfolio and did not represent a directional bet against the housing or mortgage markets,’’ Magnetar said in the statement.
The securities division’s complaint also alleged that the person who connected Magnetar with Putnam was an unnamed former Putnam employee who was fired in 2003 for excessive trading in mutual funds for his personal account, in part of a market-timing scandal at the time. Galvin brought charges against Putnam, which the firm settled, related to employees’ market timing.
Magnetar was also involved in another CDO case Galvin’s office brought earlier this year. In February, the division settled with State Street Global Advisors for $5 million for its involvement in a $1.56 billion CDO allegedly packed with Magnetar’s input.
Last year, JPMorgan Securities agreed to pay $153.6 million to settle fraud charges with the Securities and Exchange Commission that it, too, had worked with Magnetar on CDOs. JPMorgan did not admit or deny the SEC’s allegations.