Most in the mutual fund industry will remember 2003 as the year of the scandal.
New York Attorney General Eliot Spitzer, guns blazing and fresh off his monumental settlement with the Wall Street brokerage firms, unleashed a bombshell on Sept. 3 that is still sending shockwaves through the fund industry.
Scores of top-level executives have lost their jobs, and firms have collectively agreed to pay nearly $2 billion in penalties, disgorgement and reduced fees, so far.
The scandal has changed the lives of many touching the fund industry. Theodore Sihpol, III, the former Bank of America broker, has been indicted and could face up to 25 years in prison, if convicted.
Well-known former industry heavy hitters such as Dick Strong, Gary Pilgrim and Harold Baxter are likely to keep a low profile while sorting out their legal woes. Not much has surfaced about their future plans since they were dismissed from their respective firms.
Others such as Larry Lasser, who have been shown the door, but are not likely to see additional sanctions, are probably examining their options and will reemerge within the industry in time in a consulting capacity or in some sort of behind-the-scenes role, executive recruiters say.
However, Eddie Stern, Canary Capital's ringleader, is working. A trio of whistleblowers has experienced the fallout from the scandal and one well-known, well-liked fund industry vet is behind bars. Read on to find out their stories and where they are now.
Eddie Stern
Eddie Stern and his hedge fund, Canary Capital, settled with New York Attorney General Eliot Spitzer's office last September, and as part of his agreement, is required to further help with the investigation into fund abuses.
Forced to pay $40 million to settle, the Canary kingpin is working at his family's business, the Hartz Group. "Eddie is very much involved in the family business," said Stern spokesman Ron Simoncini. "I'm not so sure Eddie has a title, but he's active in managing the family's investments in accordance with his agreement with the Attorney General's office."
The deal with Spitzer allows Stern to manage investments on behalf of his family, but not to handle any third-party money. In fact, he is still allowed to own mutual funds, as long as he holds them for at least a year. "The settlement allows him to start managing others' money in a decade.
"Eddie's not active in the real estate company, but the Hartz Group has extensive investments," Simoncini said. "The company defies general perceptions of family companies work."
Eddie's father, Leonard Stern is the CEO and chairman of Hartz Mountain Group, the family's real estate business, while his brother Emanuel Stern serves as COO and president of the firm.
"This is a very large organization with substantial investments, and Eddie and Emanuel are both managers of different functions in that company," Simoncini said. "Eddie remains active in the family's non-real estate investments. Emanuel is active in the family's real estate investments."
As for a return to managing money for others down the road, Simoncini said, "I don't think he's given it any thought."
James Patrick Connelly, Jr.
James Patrick Connelly, Jr., 41, a former vice chairman at Fred Alger Management is serving a one-to-three year prison sentence for tampering with evidence in connection with the investigations into market timing at his firm. Connelly, who was turned in by other Alger employees, is serving the sentence in Mid-Orange Correctional Facility located in Orange County, N.Y. Mid-Orange is a medium-security facility in the New York State prison system. He is eligible for parole on Feb. 18, 2005 and has his first hearing scheduled for December. A spokeswoman for New York State Correctional Services said Connelly has had no disciplinary incidents as of early May and is in with the general population.
Connelly, the first fund executive to be sentenced to jail time in the scandal, instructed Alger employees to delete e-mails in relation to investigations into timing arrangements between the firm and hedge fund Veras Investment Partners. Connelly also coached employees on how to answer regulator's deposition questions.
Connelly works Monday through Friday in the afternoons and evenings, for a total of about six hours a day. Making 40 cents an hour, Connelly labors in the prison commissary, which is like the prison's facilities store.
It will surely take a long time at that rate to pay off the $400,000 Connelly agreed to pay the Securities and Exchange Commission in October. In addition, Connelly is barred from associating with any broker/dealer, or investment advisor and banned from acting in various capacities in relation to any registered investment company.
Peter Scannell
Peter Scannell, the first whistleblower in the fund industry and the man that helped regulators take down Putnam Investments, hopes to find a new professional home in the not-so-distant future.
"Do I see myself in the very near future being embraced by a firm or organization that is consistent with my philosophy in regard to mutual fund investing? Absolutely," Scannell said. "It is my intention to be affiliated with those in this industry who have always considered every investor's interest first."
Scannell, who worked in Putnam's Quincy, Mass., call center, was placed on medical leave from Putnam after sustaining neurological injuries in an attack by a brick-wielding thug in a Boilermakers Union sweatshirt. The Boilermakers are one of the unions that allegedly market timed Putnam funds.
Before the attack, Scannell said he was promoted to preferred specialist in December 2001, but is not "actively working" at Putnam now. However, Scannell, who says he holds Series 6, 63 and 7 licenses as a registered representative in the financial services industry, has no intentions of being dissuaded from pursuing a career in the fund world.
In the meantime, he spends large chunks of his free time renovating his family's mid-1800s farmhouse in Weymouth, Mass. Scannell said coming forward has been hard on his family. Aside from the obvious drawbacks of the brick attack, blowing the whistle on Putnam has, in effect, created a great financial burden on Scannell, his wife Teresa, and their young son, Paul. However, the family was prepared to deal with a crisis if and when it occurred, he said.
Scannell initially took Putnam's troubles to the Securities and Exchange Commission, which failed to follow up on the tip. He then took his information to Secretary of the Commonwealth of Massachusetts William Galvin's office, which exposed the problems at Putnam. Juan Marcelino, the former head of the SEC's Boston office unceremoniously resigned following news that his office botched Scannell's tip.
As for Putnam, the firm has seen massive outflows since November and undergone a senior management makeover. The firm agreed to pay $110 million to settle charges of wrongdoing with Galvin and the SEC, but other regulatory probes remain open and the firm could still face penalties by other officials and awards in class-action lawsuits.
Noreen Harrington
Noreen Harrington, the initial scandal tipster, has been left in limbo of sorts.
The former managing director of Goldman Sachs' fixed-income department joined Stern Asset Management, which managed Canary, in April 2001 and left during the summer of 2002. Harrington claims she was unhappy that her concerns of questionable trading activity at Stern were not followed up on.
After leaving the firm, Harrington later decided to tip off New York Attorney General Eliot Spitzer's office. Harrington's information led investigators to James Nesfield, who helped regulators further piece together the puzzle.
By now, it is common knowledge that Harrington was the one who opened Pandora's box, but what about her future prospects? "This thing is still going on, so I don't have much I want to follow up on right now," she said. "I haven't made any decisions about what I want to do going forward."
In previously published reports, Harrington acknowledged the uphill battle of being a whistleblower, including finding work, and said she doesn't expect things to come easy. Harrington, who also has worked for Barclays Bank, said in a December interview with USA Today that she plans to start a hedge fund.
James Nesfield
James Nesfield once hunted for market-timing friendly fund firms for Eddie Stern and Canary Capital. Not anymore. Since the Spitzer investigation and the loss of his only client in Stern, Nesfield has closed his consulting firm Nesfield Capital.
Andrew St. John Goodwin, a Canary employee and reluctant whistleblower, originally stumbled across Nesfield's resume on the Internet and brought him into the mix. Nesfield was recruited to find firms that would grant Canary the capacity to time and was paid $50 an hour.
Labeled as one of three Canary whistleblowers, Nesfield is reportedly now working for a law firm earning $2,000 a month. There he helps the firm's clients analyze their internal controls. He also packs fish at night as a second job.
He resides in Engelhard, N.C., a town hours away from any major city, with his second wife and four home-schooled children in a house more than a century old that the couple purchased for $35,000. Nesfield, a college dropout and the son of a union organizer, got his start at Paine Webber and later bounced around Wall Street from job to job over the next decade. While consulting for Stern, he worked from his home.
Nesfield now is reportedly looking for backers to help him start his own electronic exchange to compete with the Nasdaq, but has not been granted permission to do so by the SEC.
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