“The Securities and Exchange Commission is considering bringing civil charges against Putnam Investments and several of its portfolio managers as early as Tuesday, according to people familiar with the inquiry,” writes Tom Lauricella in today’s Wall Street Journal.

“Any charges would follow Putnam’s disclosure last week that six of its portfolio managers had engaged in “market timing” of the firm’s funds several years ago. Market timing is rapid trading of mutual-fund shares that generally is considered harmful to long-term shareholders. Putnam said four of those managers timed the portfolios they were responsible for overseeing and now would be leaving the firm. When it detected the trading in 2000, Putnam took no disciplinary action against the managers beyond telling them to stop such trading, it said last week.”

“The SEC also has found evidence of managers timing their own funds at fund firms other than Putnam and is expected to bring additional enforcement actions in the next several weeks, people familiar with the investigation said.”

“The agency is weighing insider-trading charges against fund managers who engaged in market timing of their own funds if the managers used privileged information about the valuation of their portfolios. Such charges are a possibility in the Putnam case, but no decisions have yet been made, according to people familiar with the inquiry.”

“Charges against Putnam by the SEC — which could come the same day as civil-fraud charges by Massachusetts regulators — would represent another escalation of the fund share-trading scandal that has been sweeping the mutual-fund industry since early September when evidence of wrongdoing was made public by New York Attorney General Eliot Spitzer.”

“A Putnam spokeswoman declined to comment about any SEC charges. In a statement Friday, the firm said it was working closely with regulators and ‘will continue to do so to assure that these matters are resolved in a way that is in the best interests of our clients and shareholders.’ Putnam added that it ‘has a strong tradition of adherence to high standards of ethical conduct.’ “

“Market timing involves short-term trading of mutual funds that seeks to take advantage of short-term discrepancies between the price of a mutual fund’s shares and out-of-date values on the stocks and bonds within the fund’s portfolios. It is especially common in international funds as traders can exploit differences in time zones. Typically market timers hold a fund for only a few days.”

“Such trading can be extremely profitable for the trader but harms long-term investors primarily by reducing their potential profit. Some fund regulators and academics contend that the profit from market timing can come dollar for dollar from the pockets of long-term shareholders.”

“Market timing, by itself, isn’t illegal. But most funds have rules in their prospectus discouraging or limiting such trading and if a firm permitted market timing despite those rules, that could be a violation of securities laws, regulators say.”

“In a sign of how widespread improper fund trading may have been, the SEC, which sent requests for information about market timing to about 88 fund firms, has found evidence that at least half appear to have had arrangements to allow market timing, SEC officials said.”