Compliance April 11, 2005

Supreme Court Determines IRAs Exempt from Bankruptcy Estate

April 11, 2005 (PLANSPONSOR.com) - The US Supreme Court has overturned lower court rulings for a case in which a couple was trying to shield their IRA accounts from access by creditors after filing for Chapter 7 bankruptcy.
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Richard and Betty Jo Rousey claimed their IRAs were exempt from the bankruptcy estate under the provision that states that a debtor may with­draw from the estate his “right to receive . . . a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or con­tract on account of . . . age,” according to the court opinion.   The Bankruptcy Court, agreeing with the Bankruptcy Trustee’s objection, ordered the IRAs turned over to her, and the Bankruptcy Appellate Panel agreed.

The 8th US Circuit Court of Appeals affirmed the bankruptcy court’s decisions, saying that, even if the Rousey’s IRAs were “similar plans or contracts” to the plans specified in the provision, their IRAs gave them no right to receive payment “on account of age,” but were instead savings accounts readily acces­sible at any time for any purpose, the opinion said.

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In its opinion, the Supreme Court said the IRAs do provide a right to payment “on account of age” since the Rouseys would suffer a 10% penalty if they withdraw from their accounts prior to age 59 ½. The court said the 10% was substantial and prevents access to the 10% if the Rouseys were to withdraw early.

Further, the court determined that the IRAs were similar to the plans listed in the provision, saying they represent income that substitutes for wages lost upon retirement.   The court said that the similarity is demonstrated by the following facts:

  • Regulations require distribution to begin no later than the calendar year after the year the accountholder turns 70½;
  • Failure to take the requisite minimum distributions results in a 50% tax penalty on funds improperly remaining in the account;
  • Taxation of IRA money is deferred until the year in which it is distributed; and
  • Withdrawals before age 59½ are subject to the 10% penalty.

The lower court rulings were reversed and remanded by the Supreme Court.   The opinion is  here .

Administration April 10, 2005

Putnam Call-Center Rep Says Market-Timing Warnings Were Ignored

October 28, 2003 (PLANSPONSOR.com) - Recent investigations by Massachusetts state regulators into Putnam Investments mutual fund market timing were spurred by a call-center employee, after his complaints to the company and the US Securities and Exchange Commission (SEC) were ignored.
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Peter Scannell contends he noticed irregular activity in customer mutual fund accounts from 2001 until earlier this year.   At the time, Scannell believed the heavy customer trading was designed to reap short-term profits and he was spurred into action by his belief that the trading was hurting other Putnam investors, according to a Wall Street Journal report.

“I’ve worked at a casino,” Scannell , a former maitre d’ at a Lake Tahoe casino resort told the Journal. “I know a racket when I see it.”

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However, when Scannell brought these irregularities to Putnam’s attention, he was ignored and was later assaulted in an incident that he says was connected to his attempts to stop the trading, leading to a disability leave from Putnam.   Then in March, says he Scannell scheduled a meeting with the SEC in Boston that also led nowhere.

Finally, Scannell said, Massachusetts regulators moved to subpoena Putnam records after he provided detailed trading accounts to them in September.   Now Scannell has now emerged as an important source of evidence supporting charges that the state expects to bring Tuesday against Putnam (See  Union K Plan Trading Activity Leads to Putnam Fund Probe ). “Peter Scannell showed tremendous courage in providing information to this office,” said Matthew Nestor, director of the Massachusetts Securities Division. “This case would not have started without him. The information he provided us has proved to be accurate and we certainly appreciate his help.”

Investing Irregularities

Putnam retirement fund customers made thousands of trades in and out of Putnam international funds through the call center, Scannell told regulators.   Normally, the unusual activity would begin between 3 pm and 4 pm Eastern time, the end of regular market trading, when orders would pour in.

This technique – practiced between July 2000 and January 2003, involved 10 participants in a union 401(k) plan, Scannell said.   During the time, the participants made 5,340 trades involving $657 million of shares.   By estimates compiled by Scannell, the total gains added up to $2 million.

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