“Trying to contain deepening investor mistrust, one large mutual fund company ousted its founders yesterday and another settled a securities fraud case brought against it only two weeks ago,” writes Gretchen Morgenson in today’s Wall Street Journal.

“PBHG Funds, an 18-year-old fund company in Wayne, Pa., that ran some of the hottest investment portfolios in the 1990’s, announced that it had removed its co-founders, Harold J. Baxter and Gary L. Pilgrim. The ousters followed the discovery that Mr. Pilgrim had invested in a private partnership that was allowed to frequently buy and sell the shares of PBHG Funds from March 2000 to December 2001.”

“Such trading, known as market timing — which is considered improper but is not illegal — often uses portfolio information that is not available to other shareholders, and the frequent trading increases costs for other investors.”

“Mr. Baxter, who was not an investor in the partnership, was aware of its trading in PBHG funds, the company said.”

“In Boston yesterday, the management of Putnam Investments settled a securities fraud lawsuit brought by regulators on Oct. 28, agreeing to restrict its employee trading, heighten scrutiny of employees’ practices and strengthen the independence of its fund directors. In its suit, the Securities and Exchange Commission asserted that Putnam had failed to deter and disclose improper and opportunistic trading by a handful of its fund managers who bought and sold shares of funds they oversaw.”

“Both moves indicate how eager fund companies are to put their involvement in the widening scandal behind them. Each company continues to be under investigation by state and federal regulators.”

“But even as federal regulators said they were pleased with the settlement they had struck with Putnam, state regulators in Massachusetts and New York who are continuing to investigate the company criticized the agreement, calling it a capitulation by the S.E.C.”

” ‘It’s clear that the S.E.C. is more interested in papering over wrongdoing than uncovering it,’ said William F. Galvin, commonwealth secretary of Massachusetts and the first regulator to identify problems at Putnam. ‘Their haste in entering into this agreement in what by far has been the most outrageous example of insider trading suggests that they are setting the bar here very low when it comes to mutual fund conduct.’ “

“Since early in September, when Eliot Spitzer, the New York attorney general, announced the findings of an investigation into improper trading by hedge funds in shares of mutual funds, securities regulators have disclosed a string of dubious practices at large fund companies that, among other things, allowed their own employees to profit at the expense of other shareholders.”

“The disclosures have alarmed many investors, who have cashed in billions of dollars in fund shares in recent weeks.”

“The regulatory scrutiny of fund companies has also cost several executives their jobs. Lawrence J. Lasser, the former chief executive of Putnam Funds, was fired on Nov. 3; although not implicated in the improper trading by Putnam fund managers, he was aware of the activities and did little to stop them. And Richard S. Strong, the founder of Strong Funds, resigned as chairman on Nov. 2 and may face criminal charges as early as next week for improper trading he conducted for himself, his family and friends, prosecutors have said.”

“New fund companies continue to appear under the regulatory microscope. Yesterday, FleetBoston Financial said in a Securities and Exchange Commission filing that its subsidiaries had received subpoenas and information requests from state and federal regulators as well as NASD for records relating to mutual fund trading. The company, which recently agreed to be acquired by Bank of America, said it was cooperating fully with the investigation. The requests relate to late trading in fund shares and market-timing activities.”