With all the stock-market craziness of the past few weeks, it’s easy to forget other recent scandals that shook the investment industry. Well, some investors in Putnam funds have been receiving some long-awaited reminders in the mail: their reimbursements for enduring another financial fiasco that took place several years ago.

With all the stock-market craziness of the past few weeks, it’s easy to forget other recent scandals that shook the investment industry. Well, some investors in Putnam funds have been receiving some long-awaited reminders in the mail: their reimbursements for enduring another financial fiasco that took place several years ago.


The final round in the first wave of payments was scheduled to go out the door last Tuesday to investors in 86 mutual funds who lost money in the market timing maneuvers uncovered at Putnam Investments in 2003.


It won’t be enough for them to retire early: The average payment will be just a little more than $100, and a Putnam spokeswoman says most will be less than $25. By the time all the payments, with interest, are shipped out, the Boston firm will have paid about $166 million to more than 1.5 million investors.


The mutual fund industry’s market-timing scandals provide just another example of how regulations were inadequate to stop improper behavior among industry insiders from harming average consumers – the same problem we’re seeing now with the mortgage meltdown.


Market-timing traders took advantage of the inefficiency in the way mutual funds are priced to make rapid trades in and out of funds. Sometimes, as in Putnam’s case, traders targeted international stock funds that hadn’t yet been repriced to reflect the market action overseas. The trades, which were often made for certain favored clients such as hedge funds, drove up expenses for long-term shareholders.


The Securities and Exchange Commission and state regulators eventually reached hefty settlements with Putnam and many other fund firms to reimburse shareholders for the market-timing expenses.


The final total in Putnam’s case – $153.5 million, along with another $40 million in penalties – was eventually calculated back in 2005. But the checks in this first round of payments from Putnam’s “Fair Fund” first started going out to investors last month. The complexity of the distributions, which were being sorted out by the SEC at the same time as other market-timing settlements, was one big reason for the delay.


David Bergers, head of the SEC’s Boston office, says the SEC needed a ruling from the IRS for a review of the tax implications for the distribution recipients. That request was submitted in late 2005, and was wrapped up in late 2006. Then the exact amount owed to each investor needed to be calculated. That process isn’t going to happen overnight – especially when you’re sorting through more than 1.5 million investment accounts and 86 mutual funds.


To some people, the money may feel like too little, too late. But Putnam has arguably paid a much steeper price for the transgressions than most of its investors did. Its assets under management have plunged from nearly $280 billion before the market-timing scandal to about $160 billion now. Investors, concerned about Putnam’s credibility, headed for the exits.


Putnam has tried to restore faith with a management shakeup and changes in corporate culture. But Wenli Tan, a mutual fund analyst at Morningstar, says Putnam has struggled to bounce back from the market timing scandal because of the relatively poor performance of many of its funds. She says many of them were heavily invested in financial stocks – including Bear Stearns, the poster child of failed investment banks – when that sector recently imploded.


The current debacle in the debt markets is just the latest example of how Wall Street wizards often are too clever for their own good, dodging regulatory scrutiny to squeeze out paper profits until their grand plans start to unravel.


Look back in the past decade, and you’ll see a common theme running through the accounting shenanigans, the biased investment bank research, the mutual fund market-timing, and the insurance bid-rigging. The unfortunate rise of the subprime mortgage market – one that became increasingly dependent on selling mortgages to people who couldn’t afford them – fits right into this trend.


No matter who wins the elections in November, you can bet the new president and the new Congress will put market regulations high on their agenda. They’ll resume the debate about how to balance careful oversight that protects the average investor with the freedom necessary for the capital markets to work efficiently. Hopefully, they’ll get it right this time.


Jon Chesto is the business editor of The Patriot Ledger. He may be reached at jchesto@ledger.com.