40:4-kLri 200:i Gifi,

UNITED STATES DisTRicT coutaSOLITIEFRN DISTRICT OF NEW YORK

,

MR:11,MT PFLUGR AT1 lOn BeLlf 01 Civil Aefion No CASTV„.1and All Others Similarly Situated,

• CLASS ACTIONPlaintiff,

. COMPLAIN`I FOR VIOLA'fiON OF THE

JUDGE ,

vs. FEDERAL SECURITIES LAWS •

THE BEAR ST EARNS ('OMPANIES, IN(',;BEAR., STEARNS SECURITIES CORP.;'BEAR, STEARNS CO., INC.; CANARY .CAPITAL PARTNERS, LLC; CANARYINVESTMENT MANAGEMENT, LL C;CANARY CAPITAL PARTNERS, LTD.;EMPIRE FINANCIAL 1101_,DINGCOMPANY; EMPIRE FINANCIAL GROUP .INC.; ADVANTAGE TRADING GROUP, IINC.; JANIJS FUND; JANUS ENTERPRISEFLIND; .IANUS TWENTY FUND; jANUSCAPITAL CORPORATION; JANUSCAPITAL GROUP, INC.; JANUS CAPITALMANAGEMENT EE( JANUSINVESTMENT FUND; MILLENNIUMPARTNERS, L.P.; EDWARID J. STERN;DONALD A. WOJNOWSK I, JR.; PUTNAMOTC & EMERGING GROWTH FUND and IPUTNAM INVESTMENT MANA(EMENT,EEC,

1)elenilants.x DEMAND FOR JURY TRIAL

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OVIi]ltVIEW

1. fhis is i securities class action on behalf of all persons or entities, other than

defendants, who purchased and/or sold shares or other ownership .units of one or more mut 'tat funds

in the Janus or Putnam flunily of mutual funds (as described below) between November 1, 1998 and

July 3, 2003 (the "Class Period") and, as a result of defendants' conduc1, were damaged,

2. Plaintiff charges defendants with engaging in an unlawhil and deceitful course of

business designed to financially advantage defendants to the detriment of plaintiff and the other

Class meinbers. Defendants violated the federal securities laws by engaging in a scheme that

operated as a fraud and deceit on plai nti ff by allowing certain favored investors to time mutual fund

trades. The Janus Fund and Putnam Fond defendants as defined below), in contravention of their

fiduciary responsibilities and disclosure obliuilianc, laded 10 disclose that CCII;00 favored in‘osiors

were allowed to time their mutual fund 11110 05. Such timing improperly allows certain iiivesiors

trade in and 001 of a mutual lurid to Lxplon short- term moves and inefficiencies in mutual fund

prices and to take advanhige nI hiLl hours tn_u_ling not iNtaili:thle to other nuitiuil hind purchasers.

3. Plaintiff seeks to pursue remedies under the Securities Aet oI 1933 (the "Securities

Act"), Me l. lecurities Exchange Act of 1034 (the %change Act") and the Invt.'stment Advisers Act

of 1930 (the `Investment Advisers Act").

JURISDICTION AND VENUE

4, This Court has jurisdiction over the subject matter of this action pursuant to § 37 of

the Exchange Act (15 U.S.C. § 78aa); § 22 of the Securities Act (151_1 .C: § 77v); § 800- 01 °t ate

Investment Advisers Act (15 USE, § 80b-11); and 28 U.S.C. §§ 1331 and 1337.

5. Many of the acts alleged herein, including the preparation and dissemination of

materially false and misleading information, occurred in substantial part in this District. Defendants

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conducted other substantial business ‘vithin this District and many Class members reside within this

1.)istrict.

6, Im connection with Mc acts alleged in this complaint, : defendants, directly or

indirectly, used the means and instrumentalities ofinterstate commerce, including, bat not limited to,

the mails, interstate telephone communications and the facilities of the national securities markets,

PARTIES

Plaintiff

7. Plaintiff Michael Pflu g rath, as set forth in his certification, which is attached and

incorporated by reference herein, purchased inel/or sold shares or units 1...1t . iW j J1IID 171,111C1,

'twenty Fund and Janus Enterprise Fund and the Putnam OTC &, Emerging Growth Fund during the

• (:Iass Period and, as a result thereol . suffi s red il.mages from defendants' unlawIM conduct.

The Bear Stearns Defendants

8. Defendant The Beat Stearns Companies, Inc, is the patent company of defendant.

Bear., Stearns & Co., Inc., a global investment banking, securities, trading and brokerage firm.

Through defendant Bear, Stearns Securities Corp., a vholly owned subsidiary of 'flie Bear Stearns

Conmanies, inc., the firm processes approximately of - the New N'ork Stock Exchange ("NYSE")

volume cleared daily through the, National Securities Clearing Corp.. Bear, Stearns ,(f ,;centrities Corp.

is the largest borrower of 1.J.S. equities, and for over a decade fias neatly 20'' of the

ri•?.ported NYSE Short interest Its principal place of business is located LI ,A.,,..ventie,

New York, New York 10179.

9. Defendant Bear, Stearns & Co., Inc. is a global investment banking, securities, . .

trading and brokerage firm andt.wholly owned subsidiary of The Bear Stearns (..iornpanies, • hie. • .

ID. Defendant Bear, Stearns Securities Corp. is a wholly owned subsidiary orkhe Bear

Stearns Companies, Enc., Nv hich processes approximately 8°,/,-, of the NYSE volume cleared daily

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through the National Securities Ch.-;aring Corp.

11. Defendants The Bear Stearns Companies, Inc., Bear, Stearns Co,, Inc. and Bear,

Stearns Securities Corp. are collectively referred to herein as "Bear Stearns."

'rite Fund Timer Defendants

1 7 . Defendant Canary Capital Partners, 1_1_,C, is a New Jersey limited liability company

with offices at 400 Plaza Drive, Secaucus, New Jersey. Canary Capital Partners, was an active

participant in the unlawful scheme alleged herein.

13. Defendant Canary Investment Management, is a New Jersey limited liability

company, with offices at 400 Plaza Drive, Secaucus, New Jersey. , Canary Investment Management, .

was au active participant in the unlawful scheme alleged herein. •

14. Defendant Canary Capital Partners, Ltd., is a Bermuda limited liability company

Canary Capital Partners, Ltd., was an active partit.'iptint. 111 the unlawful sctioine allege..d herein_

15. 1)efendant rdward J. Stern ("Stern") is a resident of New York, New York.. Stern

was the managing principal of Canary Capital Partners, .1.1.C, Canary Investment Nianagement,

and Canary Capital Partners, Ltd. and was an active participant in the unlawftd scheme alleged

herein.

16. Defendants Canary Capital Partners, Id Canary Capital Partners, Ltd, 6.!anary

Investment Management, 1..LC, and Edward .1. Stern tire collectively referred to herein as the

-Canary defendants."

17. Defendant Empire Financial liolding Company is a publicly traded cornpany that

offers discount brokerage to retail and institutional investors through the Internet t .ind automated

• phone services, It also offers broker-assisted trades. Through its subsidiary, Advantage Trading

Group, Inc., Empire Financial Holding Company performs clearing services for its own transactions

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and third-parties. Empire Financial Holding Company was an active participant in the unlawful

scheme alleged herein.

18. Defendant Empire Financial Group, Inc. is a wholly owned subsidiary of Empire

Financial Holding Company. Empire. Financial Group, Inc. 's principal place of business is located at

1385 West State Road, #434, Longwood, Florida 32750. Einpire Financial Group, Inc. was an active

piirticipant in the unlawful scheme il leged herein.

19. Defendant Advantage Trading Group, Inc. ("Advantage") is a wholly owned

subsidiary of defendant Empire Financial Ifolding Company and performed clearing services for

Empire's transactions and for third parties. Advantage conducts Empire Financial Holding

Company's securities order execution ',Ind clearing operations. In late June 2003, inpire Financial

Holding Company announced 115 Mk:111.10n 10 !‘“,:ll hnsiness id' its

Advantage subsidiary. Advantage was Lin active p.inicipant in the unlawful scheme alleged herein.

20. Defendant Donald A. Wojnowshi, Jr. ("Wojnowski") is a resident of Honda.

Wojnowski was President (4 . Empire Financial 1 h . dding Company and was an active participant in

the unlawful scheme alleged herein.

21. Defendants Empire Financial 1 folding Company, Empire Financial Group, Inc.,

Advannige and Wojnowski are referred to herein is "Empire."

Defendant Millennium Partners 1 P. ( - Millennium") operates as a holding company

lor securities broker/dealer firms. 1 e is at on() Fi (Ili venue,

8th Floor, New York, N V 10103. lvhillennium was is ictivc... participant it) the unlawful scheme

alleged herein.

23. Defendants Canary, Millennium incnid 1nipire collectively referred to herein as the

Fund "fimers" or the "Fund Tuner defendants."

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The .lanus 'Fund Defendants

24. Defendant JaiILLS Fund is described in its prospectus as "designed for long-term

investors who priinarily seek growth of capital ancl who can tolerate the greater risks associated with

common stock investments." The Janus Fund generally invests 1 larger, more established

compaiiies.

75 . Defend 'ant kat LIS Enterprise Fund is described in its prospectus as "designed for long-

terni investors who primarily seek growth of capital and who can tolerate the greater risks associated

with common stock investments." The Janus Enterprise Fund normally invests at least 01 of its

equity assets in medium-sized companies.

26, Defendant Janus Twenty Fund is dcribed in its prospectus as "designed for long-

term investors who primarily seek growl h of capital ;iad who can tolerate the greater risks associated

with common stock investments." The Emus 'Twenty Fund normally concentrates its investments in

a core group of 20-30 common stocks.

27. Each of the Janus funds, inducing.; Mc Janus Fund, Janus ".1wenty Fund i .ind jaints

'Enterprise Fund, arc mutual funds that are regulated by the investment Company Act of 1940, are

i-iiiinaged by defendant hums Capital Managenient 1.1.C, as described below, and that buy, hold, and

sell shares or other ownership units that are subject to the misconduct alleged in this complaint.

Defendant Janus Capital Group, inc. ("Janus Capital ( lroap") is he oltimate parent et

all of thc Janus Fund clef'.ciu.ants, as defined bel, Huough its llndIas,JwIln Capital (irOlip

mark.ets, sponsors and provides investment advisory, distribution and administrative services to

mutual funds. Janus Capital Group is incorporated in Delaware i: ind is located at 100 Fillmore Street,

Denver, Colorado.

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Defendant Janus Capital Corporation was registered as an investment adviser under

the Investment Advisers Act and inanaged and advised the Janus funds until April 1, 2002, During

this period, JanlIS Capital Corporation had ultimate responsibility for overseeing the day-to-day

management of the Janus funds. Janus Capital Corporation in located at 100 Fillmore Street,

Denver, Colorado.

30. Defendant Janus Capital Nlanagement, 1.,L(..", ("Janus Capital Management ") is

registered as an investment 'adviser under the Investment Advisers Act and managed ittul advised the

Janus funds since April 1, 2002. Janus Capital Management has ultimate responsibility for

overseeing the day-to-day management of the Janus funds. Janus Capital Management replaced

Janus Capital ( 'oiporation as the invcstinent advisor to the Janus funds o'n April 1, 2002. Janus

Capital Management is loetued at 100 Fillmore Street, Denver, Colin

Defendant Janus Investment hula is die registrant and issuei of the shares of the

.Janus funds. Janus Investment Fund is located at 100 Fillmore Street, Denver, Colorado,

32. Defendants Janus Fund, Janus Twenty Fund, Janus Enterprise Fund, Janus Capital

Group, Janus Capital Management, Janus Investmeitt Fund and the Janus Capital Corp. are referred

to collectively lierein as the -Janus Fund defendants."

The Putnam Fund Defendants

33. Ti l e Putnam OTC 1'1-net-ging Growth Fniid is described in its prospectus is seeking

"capital appreciation" investing "at least of the fund's net assets in common stocks of

'emerging growth' companies."

34. 'File Putnam oTc 8.. Emerging Growth Fund is a mutual fund that is regulated by the

Investment Company Act of 1930, is managed by defendant Putnam Investment tvlanagentent, LLC,

as described below, and that buys, holds, and sells shares or other ownership units that are subject to

the misconduct alleged in this complaint.

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35. Defendant Putnam lnvesttnent fVlanagenient, 1.1 ("Putnam Management") is

registered as an investment adviser under the Investment Advisors Act and has managed and advised

the Putnam OTC Sr, Emerging Growth Fund since at least 1996. Putnarn 'Management has the

ultimate responsibility for overseeing the day-to-day management of the Putnam OTC & Emerging

Growth Fund, Putnam Management is located at One Post Office Square, Boston, MA 02109,

36. Defendants Putnam OTC & Emerging irowth Fund and Putnam Management are

collectively referred to as the "Putnam Fund defendants."

ACTION ALIAX.;ATI(.)NS

37. 'Plaintiff brings this class action pursuant to Federal Rule of Civil Procedure 23 on

behal lot. all persons or entities who purchased iind/or sold shares or other ownership units of one

inore mutual funds in the Janus or Putnam famil y of mutual finids, between Ni.ivember I. 199;

July 3, 200,3 and, as a result of defendants' conduct, were damaged. Excluded from the Class are

alefendants, members of their immediate familiesInd their legal representatives, heirs, successors or

assigns and any entity in which defendants have or had a controlling interest (the "(..lass"). Plaintiff'

and each of the Class members purchased shares or other ownership units in the Ji r intis or Putnam

family of mutual funds pursuant to a registratior statement and prospectus.

3. The Class is so numerous that joinder of all members is impracticable. While the-

exact number of Class members is unkno+Am to plaintiff il this time inil ean only he inicertained

iihromi,i) proper discovery, plaintiff believes theri.. „lie hundreds of thousimdi, ot nieinhers

.ii-iroposcd Class. Record owners mid other Class moinbers may be identified from records maintained

by the funds' administrators and may be notified o I the pendency of this action by mail, .using, the

form of notice that is regularly used in securities class actions.

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39. Plaintiff's claims are typical of the claims of the Class members as all Class members

are similarly affected by defendants wrongful conduct in violation of .federal law that is complained

of herein.

40. Plainti .ff will .fairly and adequately protect the interests of the CAMS members and has

retained counsel competent and experienced in class and sccuritieslitigation.

41. Common questions of hiw niet exist as to all Class metubers and predominate •

o'er any questions solely affecting Individual Class members. Among the common questions of law

and fact are:

(a) whether defendants implemented the nianipulative devices or engaged in the •

wrongful scheme alleged herein;

(.1:) Nvhether defilickInts' statements orriitu:‘d material facts necessary to make the

statements 'flack:, in light or the ciletanstances under which they wer,: rnadc, ot misleading;

(. 0 whether defendants misrepresented inaterial facts;

(d) whether the Exchange Act or the Securities At was violated by defendants'

acts as alleged herein;

(e) whether defendants knew or recklessly disregarded that dos statements or

omissions made by them vere .talse and misleading;

(1) whether the value oftlic hinds shares were artificially distorted by defendants'

ict.s; and

(.0 the extent of damage sustained by Class members and the appropriate measure

of damages.

4 2 . A class action is superior to all other available methods for the fair and efficient

tidjudication of this controversy since joinder of all members is inapracticable. Further, as the

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darnages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it virtually impossible for Class members to individually redress the

\vrongs done to them. There will be no difficulty in managing this action as a class action..

DEFENDANTS SCHEIVIE AND 11ZAIMULEN1' COURSE OF BUSINESS

introdnelion

43.4utual funds, including the Janus or Putnam family ofiruitual finhk, are meant to be

long-term investments and arc therefore the favored savings vehicles for many Americans'

retirement and college fui• als. ilowever, unknown to investors, from at least as early as 'November 1,

1998 and until July 3, 2003, defendants engaged in a fraudulent and wrongful course of business that

enabled certain favored investors to reap lnThv 1111111011S Of dollars in prOnt, u the eNpense ofplainti ff

and other t.....1•Iss members, throtigh secret trid Mucci trading. eligiiging 111 ilds improper

conduct, Hear Stearns, the Janus Fund defendants, Me Putnam Fund defendants iitid the Fund Timer .. .

defendants generated illicit profits and revenues arid received substantial fees and other rommeration •

For themselves and their affiliates to the detriment (.it' plaintiff and other Class members who knew

nothing of these illicit arrangements.

Mutual Fund Timing

14. "Timing" is an arbitrage strategy involving short . -term trading that ean be used to

profit from the process mutual funds use to calculate the value of securities held in the funds'

portfolios, which may not necessardv reflect the fair value 01 51(11 sceurities is ile Ch yle the net

asset value ("NAV") is calculated. A typical example is a 11.S. mutual fund that holds Japanese

securities. Because of the time zone difference, the Japanese market may close at 2 a.m. New York

time. If the U.S. mutual fund manager uses the closing prices of the Japanese securities in his fund

to arrive at an NAY at p.m. in New York, he or she is relying ori market information that is

fourteen hours old. If there have been positive market moves during the New loth tradi •ng day that

will cause the Japanese market to rise when it later opens, the stale Japanese prices will not 'reflect

them, and the fund's •NAV will be artificially low. Thus, the NAV would not reflect the true current •

market value of the stocks the fund holds. This and sinnlar strategies are known as international

tinid arbitrage.

45. .Effective timing captures an arbitrage profit that conies dollar-for-dollar out of the

pockets of the long-term investors. The timer steps in at the last moment and takes part °V ale buy-

and-hold investors upside when the market goes up, so the next day's NAV is reduced for those

who are still in the fund. Mho timer sells short on had days (as certain of the Fund Timers did) the

arbitrage has the effect ofmtiking the next day's N AV lower than it would otlierwise have been, thus •

niagnifying the losses that investors arc experiencing in a declining market

46. II3esides the wealth iiaiistci if arbitrage (called "dilution"), ihe Fund 'rimers tilso

harmed their target kinds in a number of other ways. They impose their transaction costs 00 the

long-term investors, Irides necessitated by lime[redemptions can also result in die realization 01

taxable capital gains at an undesirable time, or may result in managers having to sell stock into a

falling market.

47. It is widely i.icknowle(Iged that timing inures to the detriment of long-term mutual

fund shareholders and, because of this detrimental effect, fund prospectuses generally state that

timing is monitored and that the Janus Fund ind Putnam Fund defeniliints worked to prevent

These statemenis were maierially false and misleading because, tiOt only did the taints i'und

Putnam Fund defendants and Bear Stearns allow the Fund 'rimers to time their trades, they actively • .

facilitated the .timing arbitra g e strategy and sought to profit and did pro t from it.

The Public Disclosure of Some of Defendants" Fraudulent . Conduct

48. On September 3, 2003, New York. Attorney General Eliot Spitzer filed a complaint in

New York Supreme Court that began to expose some of the .fraudulent and manipulative conduct

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alleged herein (the "Spitzer Complaint"). The Spitzer Complaint charged Millennimn and the

Canary defendai its with fraud in connection w i ththe unlawful practices al le,ged herein and exposed

'some of the fraudulent and manipulative practices charged herein with the particularity that had

resulted from a full-scale confidential investigation.

49. The Spitzer Corriplaim alleged, with regard to the misconduct alleged herein as

•follows, t.imong other things:

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Managing the extensive timing activity in its hinds became difficult ior Janus. .In early June, 2003, it began to consider tidopting a consistent policy on market •timing. Discussion concerning development of such a policy was opened up to.eertain Janus employees. Comments included:

• "Our stated policy is that we do not tolerate timers. As such, wewon't actively seek timers, but when pressed and when we believeallowing a lirnited/controllcd amount of . timing activity x•vill be in.f('.(i's best interests (increased profitability to Mc firm) \\• . c. will makeexceptions under these parameters." (JC(1 000605)

• "My own personal recommendation is not to allow timing, II erio

and .follow the prospectus._ [T]iincrs ciften hide multiple accountsand move on the same day which could hurt other investors andenrage the Pins.... I don't think the static assets that we [night be ableto hold onto are worth the potential headaches, nor does this fall intoour 'narrow and deep' focus. I suggest We maintain the timingagreements we have, but allow no more." (.ICG 000569-570)

• "[I]l we are going to allow timing, we want to be sure .that there areenough static assets [Le., 'sticky' assets] so that we are .rnaking adecent profit for all the trouble we are put through." (.IC0 000569).

50. 'Fhe Spitzer l.lomplaint ;: illeged that the Canarn. / defendants entered into agreements

with numerous mutual fund families allowing them to time rnany different mutual funds. Typically, .

the C'tinary defendants would enter into agreements with the fund managers of the funds targeted for

timing •-- often international and equity -funds offering time zone or liquidity arbitrage. The Canary

'defendants would move the timing money quickly between the funds and to a "resting place" in a

moneyinarket or sirnilar fund in the same .1und Ilunily. By keeping the inoney often many millions

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of dollars — in the fund family, the (it'.antiry defendants assured the manager that he or she would

collect management and other fees on the amount whetlier it was in the target fund, the resting fund

or 'moving in between. In addition, sometimes die manager would waive any applicable redemption

fees. By doing so, the manager could, and did, directly deprive the fund or money that- would have

'partially reimbursed the fund tor the impact of trading.

51. On September 4, 2003, The Wall StreLl 101117(0/ reported that the Canary defendants

liad settled the charges against Mem, agreeing to pay a $10 million fine and $30 million in

restitution:

Edward Stern ... finds himself at the center of a s‘veq)ing investiorion intoihe nunual-rtind industry i .ilter paying a total of $40 million to ;m L' ille g al -tradingcharges made by the New York state Attorney (ieneral's Office. Aceording to thesettlement, Mr. Stern's hedge fund, called Canary Capital Partners 1.1.C, allegedlyobtained special irading opportunities with leading mutual- fund Lin-tines- includingBank of America Corp.'s Nations builds, 1'1ttnk Corp., Janus (...%tpitttil (lamp Inc.timi Strong Capital 111anagement Inc. hy promising to make Slibtitarltlalin various funds managed by these institutions.

'the article indicated that the fraudulent prat,ttices enumerated in the Spitzcr Complaint were just the

tip of Me iceberg, stating as follows:

In a statement, 1'1r. Spitzer said "the full extent (if this (a:implicated fraud isnot yet known," but he asserted that "the mutual-fund industry operates on a doublestandard" in ‘vhiclicertain traders "have been given the opportunity to manipulate thesystem. They make illegal after-hours trades and improperly eN.ploit market swingsin ways that harm ordinary long-term investors,"

On September 5'. 2003. 710 IVoll S'rrcct.lou,71a1 reporud iIa meNci.v York .A.tiorney

(2eneral's ()like had subpoenaed "a large number of hedge funds" and imanal funds as part of its

investigation, "underscoring concern among investors that the improper trading, of mutual-fund

shares could be widespread" and that the srA:, joining the investigation, plans to send letters to

mutual fluids ludding about 75% of assets under management in the, U.S. to inquire iibout their .

practices with respect to market-timitig and hind•trading practices.

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53. On or about October 3, 2003, The frail Street Journal reported that Merrill Lynch had

fired three brokers who helped Millennium .ietively trade mutual fundS. The brokers assisted

Millennium in timing certain mutual funcls, violating terms or those funds,

54. Also on October 3, 2003, 'The EVall Street „internal reported tliat Steven Markovitz of

Millennium pleaded guilty to illegal late trading of mutual fund shares. The article stated:

"En his plea, Mr. Markovitz acknowledged that between late 2001 and July 2003, heplaced orders On behalf of Millennium to buy arid sell Shares of mutual ,frinds. afterthe 4 p.m, Eastern time stock-market close hut at 4 p.m. prices."

The article reported that "Millennium, which manages about $4 billion in assets, made at least $200

million in profit trading mutual funds in just the past three years." The Thill ,S'ireet lautnal also

reported thin Citigroup Inc .'s Smith Barney brokertige unit fired a broker for improperly canceling

mutual fund orders between 4 and 4:15 p.nr, a fOrm of late trading.

Bear Stearns' internal Mutual Fund Routing Systems

55 Bear Stearns created an electronic !outing system for mutual fund purchasers. Bear

Steams provided its electronic routing system to othcr broker-dealers, for their customers, and

directly to their clients (including the Fund Timers) who either entered orders themselves or used a

salesman. Bear Stearns' electronic routing system enabled the Find Timers to enter orders for

mutual funds into a computerized routing system Rill by Bent Stearns. For example, the Cantu v

defendants, Empire and Millenniitin used Bear Stearns' electi °Mc routing, system to time mutual

funds.

56. Under SEC rules, nu it nal filial trades made after 4 psn..Lastern time must be executed

at the next day's price.

7. Using these electronic routing systems enabled the Fund Timers to enter and execute

mituaI fund trades after the 4 p.m. market close. In fact, Rear Steams enabled certain Fund Timers

to enter mutual fund orders through their electronic routing system up until 8 on FS'I. Rear

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Stearns would route these after-hour orders for execution at the 4 p.m. closing NAV price for the

particular mutual fund. Bear Stearns also assisted the Fund Timers Enid other broker-dealers in

routing mutual fund orders fbr execution at the previous day's NAV price,

58. Bear Stearns would Edso assist the Fund Timers in canceling orders made through

. their electronic routing systems or the phones tit or after the dose of U.S. markets or even the

follow/Mg day. Material news events miade public after the close of1J.S, nun-Lets would prompt: the

Fund Timers to call Bear Stearns, who would assist them in canceling their previous mutual fund

orders. The Fund Timers would then use the elect faille routing systems or the phones to enter new • •

order(s), after the announcement of the material news. Hear Stearns would then route the new

orders for execution at the 4 p.m. closing NAV price

Rear Stearns created its electronic routing systems kyimont any requirement .

safeguard for a pre-determined cut-off time for mutual hind orders. However, within the last month,

as news of these illegal mutual fund trading practices began to surtiice, Bear Stearns changed its

electronic routing system to a 4 pin. .EST cut-off nine for all orders.

Sticky Money Agreements

60. To generate tUrther financial gain in assisting the Fund Timers, the Janus Fund and

Putnam Fund defendants often entered into "sticky money" Eigreements. Once threatc .ned with . ,

losint_,, capacity to trade 00 any particular fund, Fund Timers (-7ould enter into sticky money

agreements with the Janus Fund and Putnam Fund dcd .enclants These siietcy agrcements were

0 compromise, where the Janus Fund and Putnam Fund defendants permitted select investors to

continue engaging in timing in a particular fund in exchange fir a promised longer-term investment

in a different fund. These were typically long-term investments made not in the mutual fund in

which the tiining activity was permitted, but in one of Janus's or Putnam's other funds cm. financial

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vehicles (e.g., a bond fund or a hedge fund run by the manager) that assured a steady flow of fees to

the Janus Fund and Putnam Fund defendants.

61.. For example, a Janus or Putnam fund might. provide a Bear Stearns' Fund Timer

client with the ability to trade a certain dollar amount in fund A, in exchange .16r an investrnont of (x)

dollars in fund 13 for (y) amount of time. After entering into a sticky money agreement, the Fund

Timers and/or the Janus Fund or Putnam Fund de:fondants would generally contact Bear Stearns to

.inform them of the arrangernent and request Mat Bear Stearns reinstate or permit the Fund Timer

client to resunte trading in the particular fund.

62. In exchange for the right to contini ie timing, which Ithrt plaintiff and other Class

members by artificially and materially depressing the ‘qilue of the mutual funds, the Fund Timers

iigreed with the Janus Fund or Putnam hind de fondants to park substantial iissets 111 the funds.,

thereby increasing the total assets under management and the lees pLnd thereon, The synergy.

between the jantis Fuud or Putnam Fund defendants and the Fund 'rimers hinged On the ordinary

investors' misplaced trust in the integrity id - mutual fund companies and allowed defendants to profit

handsomely at the expense of plaintiff and other Class members. •

Opening Multiple Accounts or Cloning

63. Bear Stearns routinely used multiple i •ii.!courits or "cloning" to directly assist and hide

the illegal mutual fund trading activities of their Fund Timer clients, 11 .: e roptla: fu lli d Timers'

illegal Activities, Bear Stoaros w • ould clone or creatc •trading i •tecouras (soinctime:-; h(Indreds)

Tor the Fund Timcrs. Thc: Fund Timers could then breakup and channel rriultiple trades to a

particular mutual fund through different accounts incl thereby hide their illegal activities.

64. Through cloning, multiple accounts .for a single client, Boar Stearns substantially

reduced the chance that a particular fund manager could identify individual Fund Timers or .prohibit

their illcg il ictivities. Since .mutwil finals identify individual ti ids by iecount nurnbc,-T only ...,...

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cloning masked the true number and amount of trades a single Fund Timer executed in . a particular

mutual fund. The creation of multiple accounts benefited Bear Sfearns..by generating additional

trades and commissions by the Fund Timers.

65. Certain Fund Timers, who were also broker-dealers, were known to take client trades

and execute them through their own firm accounts. For example, Empire would route certain client

trades to Bear Steuns through 'Empire's own firm account. Bear Stearns permitted Eimpire tO route

and execute these mutual fund trades using their own firm accounts without having to put up the

necessary capital. Empire L, ind Bear Steams would disguise these trades as "errors" in Empire's .firm •

accounts. Depending on the outcome (profitability) of the trade, Empire might keep any profit

realized (providing an excuse to its client as 10 whv lih: (lade did not execute) 01 pass through a loss

to the chem. For profitable broker-dealer accounts, like Empire, Hear :;,tearrls would look. the other

way.

.Creative Banking and Leveraging Practices

66, Bear Stearns also engaged in other unlawful business practices to assist Fund Timers

in circumventing Regulation T, 12 C.F.R. §220.1, et .vect, and "seasoning" prohibitions. Seasoning

prevents timers trom purchasing mutual .funds on margin within the first 30 days of Lill initial

Iransaction in a particular fund. Every new mutual fund purchase is subject to seasoning.

Regulation T mandates a maximum leverage ror trading on margin. To circumvent seasoning

requirements and Regulation T and to CaiciaIrapf: alarket tiliIin act ivitic::;, Bear SLearii: offered Fiald

'rimers offshore loan services.

67. The offshore loan services generally worked in the following manner. An offshore

biink branch of Bear Stearns would open im off shore iiccount in the U.S. .forfst Fund Timer that had

pre-established offshore account( s) or presence. Using its offshore offices', Bear Stearns would then

open an offshore foreign account in the same name,. The offshore 0.1fice o iI3ear Stearns would lend ..

- 16-

•• oney to the Funcl Timer's offshore foreign accomit. Assets limn the Fund Tinier's offshore •threign

'ilecount were then transferred to the Fund Timer's offshore account in the U.S by Bear Steams. The

monies lent from Bear Stearns' offshore bank branch enabled the Fund Timer to pay for mutual •ffind

purchases and leverage its purchases before seasoning at ratios far greater than otherwise

permissible. Bear Stearns used its London and Dublin oflice,s to engage • in this type of croative

banking and leveraging.

In another form of creative, leveraging, Bear Stearns would enter into contractual

agreements with Fund 'lit-viers and third-party broker dealers to leverage Fund Timers' accounts and

subsequent purchases by arrangitig loans from the third-party broker-dealers. Fund Timers took the

loans from the third-party 'broker dealers and transferred the money 10 fiear Stearns to take

advantage of additional capacity to time animal Moil purchases. Hear Ste:trns not only guaranteed

the loan assets to the third-pai ty broker-dealer but, at nines ; would also further margin the loan

account. In essence, Fund TialeTS got loans from Bear Steams and other broker-dealers to conduct

their illegal trading activities without putting any of their own money ;:it "risk.,"

69. Bear Steams and the broker-dcalers entered into these banking relationslaps with the

Fund Timers in order to generate additional commissions, 12(b)(1) foes tis described below),

banking .fees and asset management fi•es.

'Materially False and Misleading Prospectuses

70. Prior to ilIVCAIIIL2, n Illy flirah, including those under Me otahc.lantii.1

Fund and Putnarn Fund defendants, plaint.f.'arn. each member of the Class were entitled to and did

receive a prospectus, which contained substantially the same materially false and misleading

statements regarding the Janus Fund and Putnam Fund defendants' policies 00 timed trading.

71. The prospectuses falsely stated that the ,limus Fund and Putnam Fund defendants

actively safeguarded shareholders from the harafftil effects of timing. For example, in language that

-- 17 -

. .

typically appeared in the prospectuses, the February 28, 2003 taints Fund Prospectus acknowledged .•

that "market tuning" is harmful to shareholdersInd represented that the fund deters the pra.ctice, .

s'tating as kdlows:

You may make four exchanges out of a Janus fund (exclusive 0 f SystematicExchanges) per 12 month period. These limits are designed to deter short-termtrading. See our Excessive Trading Policy below for more information.

4,

EXCESSIVE TRADING POLICY

Frequent trades in your account or accounts controlled by you can disruptportfolio investment strategies and increase Fund expenses for all Fund shareholders.The Fund is not intended for market timing or excessive trading. To deter theseactivities, the Fund or its agents may temporarily or permanently suspend or .

terminate exchange privileges of any investor wlio makes more than four exchangesout of the Fund in a calendar year and bar litture purchases into the Fund by suchinvestor, in addition, the Fund or its a gents also may reject any purchase ordors(includinL,t. exchange purchases) by any investor or group of investors ....

In an cfthrt to discourage frequent tradin g , mutual funds typically impose penaltie,s

(redemption fees) on shareholders deeined to be engaged in timing and other harmful activities. In

this regard, the prospectuses typically contained the following warning:

INVOIAiNTARY REDEMPTIONS

The Fund reserves the right to close an account if the shareholder is deemedto engage in activities which iire iliegal Or otherwise believed to he detrimental to theFund, such as market timing.

73 The prospectuses faIlLd to disclos(.. and inisci..!prea'aited the follm.Ying material and

•adverse faCt6. .

(a) that theta-tuts Fund and Putnam Fund defendants hademereil 111(0 agreements

i'dlowing the Fund 'liner defendants to time their trading, of the funds' shares;

(b) th•t', pursuant to those agreements, the Fund Timers regularly timed their

trading in the funds' shares-,

- 18 --

(.0 that, contrary to the express representations in the prospectuses, the Janus

Fund arid Putnam Fund defendants enforced their policy against frequent traders selectively, 1. t.,

they did not enforce it against known Fund Timers and, at times, waived the ivdernption fees, at the

.finids investors expense, which the Fund Timers should have been required to pay, pursuant to the

Finds' stated policies;

(d) that the Janus Fund and Pulliam Fund defendants re.gu lady allowed the Fund

'linters to engage in trades that were disrupme to the efficient management of the funds andfor

.increased the funds' costs and thereby reduced the funds' actual performance: and

( c ) the prospectuses falsely represented the ainottut rif compensation paid by lite

.firnds to the J;iinus Fund and Putnam Fund defendants because their secret agreen tents with the Fund .

Timer defendants provided additional undisclosil compensation to the Janus Fund and Putnam Fund

Liefendants paid by the hinds and their vesper:1r shareholders,

Additional Scienter Allegations

7 z1. Bear Steams generated substantial revenues and profits .froin participating in the

illegal conduct of the Fund Timers. Bear Stearns collected a commission on each trade executed by

one of its Fund Timer clients. In certain circumstances., Bear Stearns also imposed an asset

management fee of approximately l u/o per year oil tile total amount of Fund funer client assets.

Bear Steams also received money frorn the, Janus Fund ind Putnam Fund defendants based on the

total assets Rear Stearns directed to a particular fund over a period ()lone year These are generally

known in the industry as 12(b)(1) fees. Many of' the Janus Fund and Putnam Fund defendants

involved also directed their institutional purchases and sales (order flow) to Bear Stearns, generating

further commissions. Bear Steams also charged banking fees to Fund Timers (in margin and those

involved in exotic bank lending deals.

- 19

75. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements issued or disseminated in the narne of the funds were materially

false and misleading; knew that such statements or documents would be issued or disseininated to

the investing public; and knowingly and substantially participated or acquiesced in the issuance or

dissemination ofsuch statements or documents as primary violations of the federal securities laws.

Defendants, by virtue of their receipt of information reflecting the true facts regarding the hinds,

their control over, and/or receipt andlor modification oldie hinds' allegedly materially misleading

misstatements and/or their associations with the funds w h Ch Made them privy To confidential,

proprietary inforniation concerning the funds, participated in the fraudulent scheme alleged herein.

76. Additionally, the Janus Fund and Putnam Fund defendants were highly motivated to

p(uinit and facilitate the wrongful conduct alloped herein and pill( iCipaiLd n ffid/01 hudH.4:11.1111

kn( -"Vied e,C CUndliet `111(- gCtl CXCL'ing°oi il1uii1.1101Illiaw1ul Pfacl1L(.'

alleged ['event, the Janus Fund and Putnam Fund defendants, among other things, received increased

management fees and other hidden compensation paid in the form °Initiated interest payments on

loans to the Fund Timer defendants. For example, tile following equail exchange 1...)etween Richard

Garland, CF(...) of Janus International, ""nd an employee raising concerns rcgarding tuned ti-ade",

demonstrates that defendants knew that the practice was both widespread and prohibited, but were

unwilling to end it because it was profitable for them:

I'm g-etting move couerned W/di or thcsv. market timers and how they arcaffecting our PM's [i.e., PortfUlio Managevsj trading activity. [Portfolio IVianag,ers]have voiced their sensitivity on a number of occasions re: this typo of activity inJWF. I spoke to In Janus employee] and confirmed that this is a big, problemdomestically and I want to avoid this at all cost betbre it gcts too problematicoffshore. Now that we have our exchange limitation in our prospectus, 1 would feelmore comfortable not accepting this type of business because its too difficult tomonitor/enforce & it is very disruptive to the PM's & operation of the funds.Obviously, your call from the sales side.

- 20 -

"For now, 1 don't think we should takc•on additional business of this nature.... Weneed to keep our litods clean and minimise [sicj issues for P1V1 's/fund performance,1)0 you agree?"

Garland responded .as •follows:

•• •1 lui ye no interest in building a business tliound mitrket timers, but at (he st •une tit nedo not wont to turn anyrp $.10m-.52thn! llow big is the [Canary] deal ...7

77 The Fund Timer defendants vere motivated to participate in the wrongful scheme by •

the enormous•profits they derived thereby. They systematically pursued the •scheine with full •• • • • •H

knowledge of the harm they caused to other investors.

78. Each defendant k hatile for (i) making false statements ., or fir liiilillg R.) diSCIOSe

ikiverse facts \dile selling shares of Me Mnds, and, or (ii) participating in a sidle-rite to dr:1'mnd and/or

it course Of business that operated as it fraud or deceit 00 purchasers of the funds and sellers shares

during the Class Period. This wrongful conduct enabled defendants to profit at • die expense of

plaintiff;:md other Class members.

FIRST CLAIN( FOR RELIEF

For Violations of §§11 aml 15 of the Securities ActAgainst the ‘Tanus Fund and Putnam Fund Defendants

79. Plaintiff incorporates and re lieges each tind every allegation contained above as if

fully set forth herein, except drat, for purposes of this claim, plaintiff expressly excludes and

disclaims any allegation that could be construed as alleging fraud or intentional or reckless

misconduct, its this claim is based solely on claims of: strict liability iindlor negligence under the

Scc •nritics Act.

80. This claim is brought pursuant to §§11 and 15 of the Securities Act, 15 kl.S.(1., §§77k

• and 77o, on behalf of the Class against the Janus Fund and Putnam Fund defendants, it is

appropriate to treat these defendants as a group for pleading purposes and to presume that i • he talse,

misleading, and incomplete information conveyed in the funds' prospectuses, public filings, press

• •„

- 21 -

releases and other publications are the collective actions of the Janus Fund and Putnam Fund

defendants.

81. The Janus Fund and Putnam Fund defendants are the registrants for one c.a more of

the fund shares sold to plaintiff and the other Class members and are statutorily liable under §11.

'The Janus Fund and Putnam Fund defendants issued, caused to be issued and participated in the

issuance at materially false and rnisleaditn.", written statements and/or omissions ofmaterial fncts

io the investing public w, hich \VCre contained in the prospectuses.

82. Each (tithe Janus Fund t .tral Putnain Fund defendants was a "control person" of the

funds within the tneaning, of §15 of the Securities Act, by virtue of their position of operational

control and/or t. tuthority over the funds. The Janus Fund and Putnam Fund defendants, directly and

indirectly, had the power and tuttliority, and exercised the sante, to eatise the funds to engage in

vsa-ongrul conduct complained of herein. Time Janus Fund t.ind Putnam l'und deteridants iSsued,

caused to be issued, and participated in the issuance of materially false and misleading, statements in

the prospectuses.

83. Prior to purchasing units of each of the .funds, plaintiff and Class members were

provided the appropriate prospectu.s. Each of the plaintiff and Class members purchased shares of

the .funds traceable to the false and misleading prospectuses.

81. Statements contained in the prospectuses were false and i .nisitatlitn.], ft ..»- a number of

reasons, including that they tat Liiat i.. was the Or the Ruidsiu noimitui iid take ,,tepS to

prevent timed trading because ()!its adverse effect on l'und investors, when, in fact, the Fund Timers .

were allowed and encouraged to engage in timed trading and enter late trades after the l p.M. close.

The prospectuses .tailed to disclose and misrepresented, inter alia , the following material and adverse

-facts:

-

(a) that defendants had agreed to tallow the Fund Timers to time trades of the

funds shares;

(b) that pursuant to those agreements, Fund Timers regularly timed .trades of the

funds' shares;

(c) that contrary to the express representations in the prospectuses, the funds

enforced their policy against frequent traders selectively, Le., they did not (11 .Ra-c0 it against (.!crtain

Fund IL 111(215

(d) that the Janus Fund and Putnam Fund defendants regularly allowed Fund

Timers to engage in trades that were disruptive to ate efficient management of the funds and/or

increased the funds' costs and ihereby reduced the funds' twitial performance; and

(e) the prospectuses failed to disclose that . , pursuant to the fink:mini agreements,

the damn; Fond and Putnam Fund defendants benefited financially at the1 .!. xpense or the funds'

investors.

8f."). As a direct and proxitrune result of defendants' acts and omissions, plaintiliand the

Class suffered substantial damage in connection with their purchases o Ithe funds' shares. 'Tlic \Tattle

or the funds shares decreased substantially subsequent lo and due to defendants' violations.

86. At the time they purchased the Mikis' shares traceable to the defective prospectuses,

plaintiff and Class members \h r ere .w, ithout Knowledge of he facts concerning the false and

inislcading statements or omissions iilleged heo-in and couldno( asonabb: .

knowledge. This claim was brought within the applicable statute of Innitations.

VIOLATIONS OF 'THE EXCHANGE A(.11'FRAUD ON lIIE MARKET

At all relevant times, the market for the funds was an efficient .market for the

following reasons, among others:

-2I -

(a) the fiaids net the requirements for listing, and were listed and actively bought

•and sold through an efficient and automated market;

• (b) as regulated entities, periodic public reports concerni •ng the •funds vere

regularly filed with die

(c) persons associated with the funds regularly communicated with public

nvestors via esniblished market communicition rnechmisms, in through regular

dissemination of press releases on the national circuits ofrinijor newswire services and through other

wide-ranging public disclosures, such as conununications ‘vith the financial press and other similar

reporting seivices; and

(d) the funds were followed by several securities analysts employed by •major

brokerage firms who wrote reports which were distributed to the sales lorce and certain cuslomers of

their respective brokerage firms. 1..tch of these reports was publicly available and entered the public

marketplace.

88. As a result of the foregoing, the market 'Or the funds promptly digested current

information regarding the funds from all publicly available sources and reflected such information in

the respective funds' NAV. Investors who purchased or otherwise acquired shares or interests in the.

funds relied on the integrity of the market for such securities. Under these circumstances, all

purchasers of the funds during the Class Period suffered siiiiilar injury ihrough their pork.;liasc or

acquisition oldie funds' SCe1l1itie tt distorted price.,, that diil not Rilk.!ct the risks ;AIR] 0115l5 (:)f thc

continuing course of conduct alleged herein, and a presumption of reliance applies.

. .

7 24- • •!

S.I'COND CLAIM FOR RELIEF

For Violation of 0004 of the Exchange Act and Rule 106-5(Against All 1)efentlants)

Plaintiff incorporates and realleges each and every allegation contained above as if

fully set forth herein except tor Clain is brought pursuant to the Securities Act.

90. During the Class Period, each of the defendants carried out a plan, scherne and course

of conduct .which was-intended to and, throughout the Class Period, did deceive the investing public,

including plaintiff and other Class members, as alleged herein and caused plaintiff and other Class

rnembers to purchase or sell funds' shares or intruiests at distorted prices and to otherwise suffer

drunages. In fliirtheranee °Idris unlawful scheme, plan and course of conduct, defendants, and each

old:tem, took the ;tenons set forth herein.

91 . 'Defendants (i) employed schemes, rind artifice:, to defraud; (it) inarte uirtruc

statements of imiterial fact and/or omitted to state material .facts necessary to make the statements

made not misleading; and (iii) engaged in acts, practices., and a course of business which op crated as

a fraud and deceit upon .the purchasers and sellers id the funds' sliares, including' plaintiff and other

Class members, in an effort to enrich themselves through undisclosed and manipulative trading

tactics by which they wrongfully appropriated funds' assets and otherwise distorted the pricing of

their securities in violation of §1 O(b) of the Exchange Act and Rule 101)-5. All defendants are sued

is primary participants in the wrongful iid llegal conduct rind scherne charged herein,

92. Defendants, individually and in concert, directly and indirectly, by the use, means or

Instrumentalities of interstate conunerce and/or ol the iils, engaged 'Lind participated in

C011tinUOUS 000150 oftonduet TO COFICeal adverse material information rilbout the funds' operations, as

specified herein.

- 25 -

93. These defendants employed devices, schemes and artifices to defraud and a course of

conduct and scheme as alleged herein to unlawfully manipulate and profit from secretly timed

trading and thereby engaged in transactions, practices and a course of business which operated as a

frimd itnd (leceit upon plaintiff and C1 L' rnetrthei

The defendants had actual knowledge of the misrepresentations and orMSsions of

material facts set forth herein, or acted with reckless disregard for the 1111111 in that they failed to

ascertain and to disclose stall facts, even though such facts 1.vere available to them. Such

defendants' material misrepresentations intik/or-omissions were done knovk Mid v recklessly' and lOt

the purpose imd effect of concealing the truth

95, As a result of the dissemination of the materially thI. id itindeading in-Awl-nation

thiltire to disclose material fis. o et ford lo W market price of the funds se(uriti.,.'.-s

were distorted during the (...doss Pei iod such that tney did not reflect the, risks and costs of the

continuing course of conduct alleged herein. 111 ignorance ot these facts thin ruarkei prices old he

shares were distorted, and relying di] ectly Or indirectly on the false and misleading statements made

by the Janus Fund and Putnam Fund defendants, or upon the integrity of the market in which the

securities trade, and/or on the absence of mitter,a1 adverse infortnanon that was known to or

ucI:Id ydisregardedhydclimduntsbutnutdi].sod ill !SUN

'lass Period, plaintiff and the °the' ( lass metnnets pitrillaJed and/oi sold the

runds Liming the C lass Period at LL,itUtt.'d o ce alltt littillagOd thcrcov

96. At the lime of the misrepresentations and omissions, plaintiff and other Class

memhers were ignorant °f awn- falsity, and believed them to be true, lad plainti 11 and other Class

members and the marketplace known of the truth colicerning ihe funds' operatniwi and the

timing activities, which \mere not disclosed by defendants, pt mmntifl imoI other Class me, nbers would

- 26 --

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