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In November 2003, Putnam Investments came under investigation by the Securities and Exchange Commission for market timing fraud.Putnam reached a partial settlement with the Securities and Exchange Commission over allegations it committed civil fraud by failing to crack down on in-and-out fund trading, also called market timing, by some customers and employees.

The settlement outlined remedial actions and a process for providing restitution to customers but left the amount of any fine undecided. Nevertheless, several class action lawsuits are cropping up around the country, by mutual fund shareholders who feel they were wronged by Putnam Investments.

Market timing is the rapid trading of fund shares designed to take advantage of short-term discrepancies between a fund’s share price and its underlying holdings. Although market timing isn’t necessarily illegal, regulators say that if mutual-fund companies with anti-timing rules permitted such trades while profiting from those arrangements, that could be a violation of securities laws.

For an easier explanation of market timing, by analogy, The New York Times Paul Krugman offers this: “You’re selling your house, and your real estate agent claims that he’s representing your interests. But he sells the property at less than fair value to a friend, who resells it at a substantial profit, on which the agent receives a kickback. You complain to the county attorney. But he gets big campaign contributions from the agent, so he pays no attention. That, in essence, is the story of the growing mutual fund scandal.”

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