SEC Concludes Its Action Against Former Putnam Employees
The Commission settled with former Putnam employee Donald F. McCracken, concluding its case against six former Putnam Fiduciary Trust Company alleged to have engaged in a scheme to defraud Putnam client Cardinal Health, Inc. SEC v. Durgarian, Case No. 05-12618 (D. Mass. Filed Dec. 30, 2005). Mr. McCracken is the former senior managing director and head of fund accounting at Putnam.
To resolve the case, portions of which were unsuccessfully appealed to the First Circuit by the SEC, Mr. McCracken consented to the entry of a permanent injunction prohibiting future violations of Section 17(a)(3) of the Securities Act. He also agreed to the entry of an order requiring the payment of a civil penalty of $35,000 and, in a separate administrative proceeding to be filed, an order barring him from association with any broker or dealer or transfer agent with a right to reapply after one year. See also Lit. Rel. No. 21110 (June 29, 2009).
The Commission’s initial complaint in this action named six former employees of Putnam, including Mr. McCracken. It centered on a claimed cover-up of a one-day delay in investing certain Cardinal assets in a defined benefit plan in 2001. As a result of the delay, Cardinal lost about $4 million in market gains. Rather than disclose the error to Cardinal, the defendants took steps to conceal it, according to the complaint. Those steps included improperly shifting about $3 million of the costs to the shareholders of other Putnam funds by backdating accounting entries and other mechanism. Cardinal ended up with about $1 million in losses. The complaint charged Mr. McCracken and the other defendants with fraud in violation of Exchange Act Section 10(b) and Rule 10b-5 thereunder and Securities Act Section 17(a) as well as aiding and abetting violations of Section 10(b).
Previously, the district court granted a motion to dismiss as to three of the six defendants. The court refused to dismiss the claims against Mr. McCracken and two other defendants however. See Lit. Rel. No. 20373 (Nov. 27, 2007). The Commission appealed the partial dismissal of its complaint to the First Circuit Court of Appeals. That court rejected the SEC’s claims, as discussed here, concluding that the three defendants had not aided and abetted the fraud since their claimed participation in the scheme occurred after the fraud was complete. See also Lit. Rel. No. 20900 (Feb. 13, 2009). The other two defendants, Karnig Durgarian, Jr. and Ronald Hogan, previously settled with the Commission, consenting to the entry of permanent injunctions prohibiting violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. Mr. Durgarian also agreed to pay a civil penalty of $100,000 while Mr. Hogan paid $35,000. See Lit. Rel. No. 20797 (Nov. 3, 2008).