Massachusetts Stiffs Putnam Whistle-Blower
Brett Arends
03/16/07 - 01:13 PM EDT
For the millions of Americans who have entrusted their life savings to the mutual fund industry, Peter Scannell is the hero you may not have heard of.
He was the Putnam Investments employee in Boston who first blew the whistle on the industry market-timing scandal a few years ago. His action exposed, and helped end, a practice that was costing investors hundreds of millions of dollars.
For this, his own career in the finance industry was destroyed -- and he didn't get a dime. Scannell may have his last chance of changing that next week, when his lawyer will go before the appellate court in Massachusetts to press his claim for millions of dollars in reward money under the state's whistle-blower law.
This follows rebuffs from both the Massachusetts former attorney general, Tom Reilly, and a lower court.
"We're going to ask the appellate court to overturn the lower court's decision," says Scannell's attorney, Robert Autieri. "Statistically, not a lot of cases are overturned. We're realistic, but hopeful."
Scannell should get his money. His treatment has been a disgrace, both to the law and to the mutual fund industry.
To recap: Scannell worked for Putnam Investments in a call center near Boston from 2000 to 2003. There he discovered that company employees, and some privileged clients in a local union, were being allowed to make short-term trades in mutual funds at the expense of long-term investors.
The practice, while arguably not illegal, was certainly unethical and was against the company's rules.
When Scannell approached managers with his concerns, they laughed at him. A few nights later he was assaulted in a parking lot by a union thug and hit over the head with a rock.
Scannell went to the local office of the
Securities and Exchange Commission. They yawned and said they'd get back to him. He waited five months. They didn't.
Finally, in exasperation, in September 2003 he walked into the offices of Massachusetts Secretary of State Bill Galvin and spoke to his securities division chief, Matt Nestor. Galvin's office regulates the securities industry in the state.
Within hours, Nestor and Galvin had sent subpoenas to Putnam, which is a unit of
Marsh & McLennan(MMC Quote), and soon followed those with action against other mutual fund companies.
Putnam eventually agreed to pay $193 million, including fines and restitution to investors, as a result of the market-timing scandals. A number of senior managers left the company. Investors have pulled tens of billions from Putnam in the wake of the scandal, and parent company Marsh & McLennan has agreed to sell Putnam to Canada's Power Financial for $3.9 billion"
Larry Lasser, the Putnam chief who merrily presided over this culture of corruption, walked away with tens of millions of dollars. Some of the fund managers fired in the scandal are now making millions more running hedge funds.
The mutual fund industry has enjoyed years of skyrocketing assets and profits, thanks to the bull market. And investors who had been ripped off by the scandal got hundreds of millions of dollars in restitution.
And Scannell?
"I'm writing a book, and I'm a stay-at-home dad," says Scannell. He's been shunned by the securities industry. "It cost me my career, it cost me and my family an enormous amount of stress. I got bashed over the head with a brick. I'm always looking over my shoulder."
Massachusetts has a law, passed in 2000, which says whistleblowers are entitled to up to 30% of the state fines resulting from a scandal they expose.
In the case of Putnam, those fines came to $50 million.
But Tom Reilly, who was Massachusetts' attorney general until a few months ago, refused to give Scannell a penny, on the grounds that he didn't submit the proper paperwork in the proper manner. A judge backed up Reilly. Martha Coakley, Reilly's successor, is so far taking the same line.
It's that position that Scannell and his lawyer are appealing on Tuesday. It's probably his last chance for justice.
What happens in court will say a lot.
Because this case isn't just about Peter Scannell. It's about encouraging future whistle-blowers to come forward, so we can expose scandals and protect investors.
That is, after all, the reason the law was passed.
I can positively guarantee you that right now, someone somewhere is stealing some of your savings. It's a 100% certainty. There are scandals, big and small, within public companies, public markets and investment firms all the time.
And there are people who know about them and are wondering whether to speak up. What happens in the Scannell case is going to influence them one way or another.
