Greg B

Mutual Fund Whistleblower Tells of Beating

By THE ASSOCIATED PRESS

Published: January 27, 2004


Filed at 6:54 p.m. ET
WASHINGTON (AP) -- He was dragged from his car and beaten with a brick after confronting an investment-company superior about trading abuses in mutual funds, Peter Scannell told Congress Tuesday.
His complaint about abuses was brushed aside by federal regulators but eventually helped lead to civil fraud charges against fund giant Putnam Investments.
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At the hearing where he testified on Tuesday, New York Attorney General Eliot Spitzer and Sen. Peter Fitzgerald, R-Ill., the head of a Senate panel, denounced what they called hidden and excessive fees that gouge millions of mutual fund investors. Spitzer also said it is unfair that mutual funds charge ordinary shareholders much higher fees than pension funds and other big investors.
Fitzgerald called the fund industry ``the world's largest skimming operation ... a trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation's household, college and retirement savings.''
Putnam, meanwhile, announced that it would cut fees paid by shareholders and provide investors more information on fees and fund managers' compensation. The company, which has lost billions of dollars from investors since being charged by state and federal authorities -- knocking it from the fifth-largest to the sixth-largest mutual fund concern -- said its move was not prompted by pressure from the regulators.
Besides Boston-based Putnam, a growing number of other fund companies and executives have been accused by state regulators and the Securities and Exchange Commission of improper trading and the defrauding of investors.
The SEC has proposed new rules, and the Senate is weighing legislation to overhaul the $7 trillion mutual fund industry, following overwhelming House passage of such a measure in November.
Scannell said he met with hostility and a veiled threat from the Putnam manager and disinterest from investigators in the SEC's Boston office early last year. It took seven exchanges with his lawyer before the SEC staff met with him, for about an hour and a half, he testified at the hearing of the Senate Governmental Affairs subcommittee.
I ``could not believe that the SEC was not acting on what I believed any reasonable regulator would consider being compelling evidence,'' Scannell said.
He later got a hearing from the office of Massachusetts' secretary of state, which acted on his disclosures.
In a partial settlement with the SEC in November, Putnam agreed to changes -- some of which the company had already begun to implement -- and a process for investors who were harmed to recoup losses. Putnam had already pledged to make restitution. The company neither admitted to nor denied wrongdoing in the accord.
In the Putnam case, participants in the Boilermakers union's retirement fund were accused of engaging in market-timing trades in the mutual funds, quick in-and-out trading to exploit price changes. In an example of favoritism, Putnam managers allowed the union to engage in the practice despite the fund company's policy prohibiting it, the regulators alleged.
Scannell, who worked at a Putnam call center outside Boston, said the time between 3 p.m. and 4 p.m. was called ``boilermaker hour'' because of the group's aggressive trading.
He said he was assaulted in February 2003, a few days after confronting his supervisor, by a large man in a sweat shirt with ``Boilermakers Local 5'' written across the chest. The man referred to Scannell's working at Putnam and ordered him to shut up, he testified.
Representatives of the union didn't immediately return a telephone call seeking comment Tuesday.