Mass. Secretary of State William F. Galvin charges Putnam Investments unit with deceiving investors

By Chris Reidy, Globe Staff

The office of Massachusetts Secretary of State William F. Galvin said Wednesday that it has charged a unit of Boston-based Putnam Investments with deceiving investors about $3 billion in investments that were loaded with mortgage-related securities that were destined to lose money.

Putnam denied Galvin’s allegations.

The complaint contends that Putnam Advisory Co. allowed a prominent hedge fund, Magnetar Capital, to be involved in picking sub-prime and mid-prime mortgage-backed securities that went into the fund with the intention of taking short positions that would profit when those investments lost money.

Galvin’s office said Putnam failed to disclose Magnetar’s involvement to investors who bought into the funds, known as Pyxis 2006 and Pyxis 2007.

Magentar allegedly “reaped an exorbitant net gain” of $67 million on its short positions and other investments in the Pyxis funds, Galvin said, while Putnam received fees of $8.8 million for its role.

“The Putnam Advisory Co. vehemently denies the allegations in the administrative action filed today by the Massachusetts Securities Division and will fight them vigorously,” Putnam said in a statement.

Galvin’s office said it is seeking the disgorgement of all fees obtained as a result of conduct described in the complaint, a civil administration fine, and a cease-and-desist order.

The Massachusetts Securities Division has been investigating whether banks and other investments firms misled the purchasers of these types of debt instruments, called collateralized debt obligations, during the housing boom in the 2000s. Galvin said.

The division is part of Galvin’s office. In February, the office hit Street Global Advisers with a $5 million penalty in a similar case.