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The Guy Who Blew The Whistle On Putnam

Nov 20, 2003 | USA

When he started working at Putnam Investments' Quincy, Mass., call center in March 2000, Peter Scannell had only a layman's knowledge of how a mutual fund company works.

But he knew from his days working at a casino in Lake Tahoe how to tell the good guys from the bad. And it wasn't long before Scannell decided the good guys weren't necessarily the ones who signed his checks.

Scannell caught onto efforts by outside investors, first from an electrical trades union and later a boilermakers union, to make rapid trades in and out of Putnam (Parent: MMC) funds, a practice known as market timing.

Alarmed, Scannell blew the whistle to the Securities and Exchange Commission which didn't act, and then to Massachusetts regulators, who did. What they heard led to state civil fraud charges against Putnam, the resignation of its CEO, Lawrence Lasser, and the withdrawal of more than $20 billion from its funds.

It also helped train a spotlight on market timing, which has ensnared eight of the USA's mutual fund companies in probes and charges.

"This would not have started without him," says Matthew Nestor, Massachusetts' director of securities. "We owe him a debt of gratitude."

In five hours of interviews over two days, Scannell, 47, said he turned in the big guys to help little guys everywhere: Mutual fund and retirement plan participants who watched their holdings plummet while others got rich. In retaliation, he says, he was attacked by a brick-wielding assailant allegedly wearing a boilermakers union sweatshirt and is being trailed almost constantly.

Quincy police recently reopened the investigation of the assault and collected Putnam documents from Scannell. The original police report confirms Scannell's description of the attack, including the brick, head injuries and sweatshirt. But he didn't tell officers that he knew boilermakers or make any references to Putnam because, he says, he feared for his safety.

The Massachusetts U.S. Attorney's office is investigating possible criminal securities fraud violations at Putnam, relating to market-timed trades by its managers. Scannell met for two hours Tuesday with the office. The FBI is also investigating, say two people involved in the matter.

Scannell's story began when he answered a Putnam employment ad in The Boston Globe in February 2000. It was a big change after working 20 years at high-end restaurants and resorts. He says he was hired at less than he had paid busboys. But as a recovering alcoholic, he wanted to get away from a lifestyle that held such temptation. And he wanted to better manage his investments.

"I was looking for something that would be a safe environment," he said in an interview at his mother's house here in Weymouth, Mass. "I saw somewhere that being a financial adviser was one of the most enjoyable careers." He says there were cooler investment houses than Putnam to work at "They let their hair down at Fidelity" but notes, "I was 45 and already cool enough."

Putnam had an air of arrogance and smugness, Scannell says, even in the nondescript four-story Quincy call center where he worked, 15 miles from the firm's sleek Boston headquarters. Call takers like the ultracasual Scannell, who never met clients face-to-face, had to wear jackets and ties every day except Friday. "For some reason, you were supposed to feel superior for being an employee of Putnam Investments," he says.

Just as Scannell started at Putnam, the company decided to eliminate market timing, a March 10, 2000, internal document obtained by USA TODAY shows. Putnam cited excessive exchanges by a small number of people that had a "detrimental effect on the long-term shareholders of those funds. The cash flow volatility in funds is so high that Putnam management believed that immediate action was required."

Scannell says that document didn't stop the practice, which is not illegal for investors but which Massachusetts securities officials say violated the terms of Putnam's prospectus. "Millions of dollars were being transferred by market timers unbeknownst and much to the detriment of the long-term shareholder," he wrote in a 10-page report he gave Nestor and the U.S. Attorney's office and discussed with the SEC.

All investors in a mutual fund pay the fees generated by trading. Frequent traders like market timers, who sometimes trade daily in and out of international funds to benefit from time differences, take profits from other investors.

Calls were routed based on volume and the call takers' expertise. Some of Scannell's first were from the Joint Industry Board of the Electrical Industry. He says he noticed that "something was just not right" in calls between 3 p.m. and 4 p.m. from the union members requesting trades from their plans based on how the tech-heavy Nasdaq stock exchange was doing.

Scannell says members would nearly always transfer their entire retirement plan balances. "It became clear that this was not long-term investing," he says. "With no diversification in their portfolios, market timing domestic tech funds was certainly not a suitable investment strategy."

After the bear market began to drag on the Nasdaq in 2000, JIB members' trades resulted in more losses than gains. Still, they didn't stop what had literally become gambling to them, Scannell says. "They'd say, 'Peter, this is better than Atlantic City you don't even have to get on a bus! Get me in!' "

Scannell says he and some colleagues worried they weren't protecting their clients' interests. But their supervisors said they weren't in a position to advise them. No other current or former Putnam sales representative or their lawyers would comment.

JIB members finally stopped trading when their losses became too substantial. Then came the boilermakers union members, no-nonsense investors who timed trades based on an international fund. Scannell's spreadsheet of Putnam market timing shows that from July 2000 to Jan. 31, 2003, 10 boilermakers made 5,340 trades involving $657 million. Their gains were close to $2 million. Boilermakers' union and JIB spokesmen did not return calls.

Scannell says he told supervisors he thought accepting the transfers might be against National Association of Securities Dealers rules. In his report, Scannell says supervisors told him that NASD was management's responsibility and that he should concentrate on performing error-free so he could be promoted. Scannell's report also says he showed Richard Crowley - his supervisors' manager a spreadsheet showing all the market timing at Putnam, but that Crowley said it would be difficult for the firm to track market timing. Crowley declined to comment.

Testing the system

Despite his wave-making, Scannell was promoted to preferred specialist in December 2001. He still worried about market timing, and, he says, in January 2002 decided to disprove managers' assertions and show that Putnam could and did track such trading. Scannell says he made 18 transfers in and out of three international funds known to be market timed.

Scannell says he netted just a $45 gain overall, but in May 2002, he received a letter from Putnam Senior Vice President Mark Goodfellow telling him to stop making the transfers or face suspension or firing.

Last Jan. 30, Scannell says he told his bosses he would no longer accept transfers from known market timers. The next day, he took home the information he had compiled because he planned to alert securities regulators. "I drove home looking over my shoulder," Scannell wrote in the report. "I remember laughing at how paranoid I was - actually I was shaking, I was so scared."

Two days later, on a sleeting Sunday night, Scannell went to an Alcoholics Anonymous meeting at a church in Quincy. He says in the report that he was sitting in his car drinking coffee and listening to the radio when the driver's door opened and he was yanked out by his jacket. He says he looked up and saw a "large burly man with a full beard, N.Y. Yankees' cap and gray sweatshirt that had Boilermakers Local 5 emblazoned across the chest area in large bold letters." He says he was hit repeatedly on the head with what he later learned was a brick by the man, who mentioned Putnam several times and warned him to shut up. Officer William Horick of the Quincy police said in his case report, obtained by USA TODAY, that he responded to a call and found Scannell hanging by his Volvo's shoulder belt with a bleeding gash on the back of his head. A brick was on the ground next to the car door.

Because of neurological problems from the injuries, Scannell is on disability leave from Putnam and says he's not sure when his "therapist will think it's healthy for me to rejoin Putnam." He's earning about 70% of his base pay, which he says was less than $100,000 a year. He says Putnam offered him a promotion the week after his attack that could have paid six figures.

In April, Scannell and his lawyer met with three lawyers from the SEC's Massachusetts regional office for about 45 minutes. Scannell gave them his documentation, including spreadsheets of market-timing activity by investors including the boilermakers and e-mails from managers. He says they thanked him for his "courage" and said he could call back. When he did, the SEC said it was a private probe. The agency didn't act on his tip, focusing instead on allegations of market timing by managers in their own accounts.

Scannell stewed for a few months, went to therapy and AA meetings, spent time with his 4-year-old son, Paul, and started renovating the outside of his Greek Revival home. Then, after reading about Massachusetts Secretary of the Commonwealth William Galvin's aggressiveness toward the financial services industry, he asked his lawyer to call Galvin's office. That led to a four-hour meeting with Nestor on Sept. 11 one week after New York Attorney General Eliot Spitzer launched a probe into hedge fund Canary Capital and four mutual funds over suspected trading abuses. That same day, Galvin subpoenaed Putnam and demanded extensive trading records.

Nestor says subpoenaed documents have corroborated Scannell's claims. Putnam spokeswoman Nancy Fisher says the firm believes there are "substantial inconsistencies in the comments attributed to Mr. Scannell" but would not provide examples. Putnam has hired an outside law firm to review market timing at the company and says it has stopped the practice.

Scannell's allegations, first reported in The Boston Globe, so embarrassed the SEC that the head of the Boston office, Juan Marcelino, resigned.

SEC officials in Washington won't comment on Scannell or the reasons for Marcelino's departure. But several staffers argue that a national regulatory agency that gets 1,000 "hot tips" every day can't follow up on every one. The SEC last week announced a settlement with Putnam over civil fraud charges relating to the "self-dealing" managers. Putnam is still facing civil fraud charges in Massachusetts.

"I liked him immediately, which is not to say we took everything he said at face value," Nestor says of Scannell. "It's never easy to do something so completely different from what anyone else would."

A big Irish family

Part of Scannell's likableness comes from his background. The Scannells are Kennedyesque in their wit, looks, family size,eight children and proximity to tragedy.

Paul, the dashing oldest child, was working as a ski guide when he died as a result of injuries from a 1994 helicopter crash that killed Walt Disney President Frank Wells. David, the free spirit, was struck by a hit-and-run driver while riding his bicycle through Quincy two years later. He's a semi-comatose quadriplegic living in his mother's den.

The father of the clan, David, a salesman, died two years ago of cancer in his estranged wife's living room, near the den where his son lies. Peter says his father, "a champion of the little guy's cause," would be "getting a hoot out of this."

His mother, Barbara, the first female selectman in Weymouth in the late 1970s, was skeptical when her middle son first told her what was going on at Putnam. Now, she says, she's "surprised at the enormity of it. It's funny to think one person can create this."

Peter's wife, Teresa, just wishes he would finish the work on the house.

But around his hometown, Scannell is a hero. When he went to vote this year, Scannell says, the woman who checked his voter card told him: "Thank you very much, Mr. Scannell. We're very proud of you."


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