The whistleblower who helped take down Putnam Investments for alleged mutual fund trading abuses is suing the Massachusetts Attorney General in an attempt to secure a bounty for his role in exposing the scandal.

Peter Scannell, a 48-year old Weymouth, Mass., resident, filed a civil lawsuit in the Suffolk County Superior Court against Massachusetts Attorney General Thomas F. Reilly and the Commonwealth itself, hoping to collect a $15 million reward under the state's False Claims Act.

Originally enacted in 2000 in response to the state's Treasury scandal, the Massachusetts False Claims Act was designed to recover funds that were stolen through fraudulent means by government contractors. Specifically, legislators were concerned about cost overruns on Boston's massive highway and tunnel excavation project known as the "Big Dig." The project has become a black eye for the city of Boston, literally and figuratively, as Reilly is now embroiled in heavy litigation over the botched public works effort.

Within this piece of legislation is a qui tam, or whistleblower provision, that allows citizens with evidence of fraud against government contracts and programs to sue, on behalf of the government, in order to recover the stolen funds. As a reward for the risk and effort of filing a qui tam case, the whistleblower may be awarded a portion of the funds recovered, typically between 15% and 25%. (The words qui tam are derived from a Latin phrase that means, "He who takes action for the King as well as himself.")

The move comes after Scannell was denied a $15 million reward by the Attorney General's office, a sum he believed he was entitled to as an informant in the case against Putnam. In the end, Putnam paid a total of $193.5 million to state and federal regulators to settle charges for alleged market-timing and self-dealing transgressions. The final fine and restitution tally included $50 million paid to the state.

In a June 14 letter to Scannell's attorney, David Kerrigan, Reilly's government bureau chief, praised Scannell's assistance in uncovering wrongdoing at the Boston mutual fund giant, but ultimately ruled that he does not meet the criteria for a whistleblower under the statute. Therefore, the former Putnam call center clerk was deemed ineligible for the 30% compensation of Putnam's fines to the state of Massachusetts he was seeking.

"While Mr. Scannell's revelations were important in exposing the violations committed at Putnam, the state cannot hand out $15 million to someone who does not meet the standards established in the law," Kerrigan said in a written statement.

With that, Kerrigan was alluding to the fact that Scannell did not file a claim with the attorney general's office prior to the Putnam settlement. The proper procedure for filing for a reward under the False Claims Act is to sue the individual or corporate entity believed to be defrauding the state. From there, the complainant can hand it off to the attorney general, work with the office or recommend to the office that it file a lawsuit.

No Citizen's Arrest

Essentially, it is akin to a citizen's arrest. But Scannell's mistake was that he didn't follow that procedure. According to Kerrigan, Scannell doesn't even have the legal authority to make the claim that the prospectus is a binding contract.

Kerrigan noted that Scannell did not identify a demand or request for payment being made to any state agency by Putnam, as stipulated by the statute, in his request to receive compensation for blowing the whistle. Rather, Scannell argues that the prospectus issued by Putnam constitutes a contract with its customers, including the Massachusetts Pension Reserves Investment Management Board (PRIM), and that the information in the prospectus was false, thereby violating the law. "I see no cases or authority supporting that position in your letter," Kerrigan wrote in the rejection letter to Scannell.

Scannell's lawyer, Robert C. Autieri, argues that the PRIM board, a "political subdivision" covered under the Act, had $1.7 billion of state retirement money invested with Putnam at the time the market-timing practices were exposed. In addition, numerous cities and towns had millions of dollars invested with Putnam. In both instances, the parties suffered significant losses as the result of the preferential treatment Putnam provided to hedge funds and other large investors.

"The Attorney General's decision to deny Mr. Scannell's claim and demand leaves him with no other alternative to enforce his rights but to file a complaint in Superior Court," Autieri said, in a prepared statement. The denial of Scannell's claim "appears to be based on a narrow and technical interpretation of this relatively new statute," he added.

While Autieri conceded that Scannell would have had an easier time getting a reward had he filed a claim prior to the Putnam settlement, he contends that his actions were consistent with the spirit of the law. "The intent of the statute is very clear," Autieri said in an interview. "It is to encourage ordinary citizens to go to the authorities when they become aware of fraud or a fraudulent claim that affects the Commonwealth [and] work with them toward stopping that fraudulent activity, prosecute it and hopefully recover monies in return."

Additionally, Autieri noted that Scannell, who now works for the state as an archivist, was unaware of the recently enacted False Claims Act until about two months ago, when Autieri's office alerted him of his rights. Autieri also pointed out that there is very little precedent on these matters, given that the law has only recently been put on the books and a limited number of cases have been brought.

Whistleblower Deterrent

When asked about the implications of the attorney general's decision, Autieri responded, "It sends a very negative message [to other would-be whistleblowers.] It's unfortunate."

Scannell first reported evidence of abusive market timing to the Securities and Exchange Commission, which failed to act, and then to Secretary of the Commonwealth William Galvin and Securities Division Chief Matthew Nestor, who proceeded with the allegations. In addition to the fines Putnam paid in its settlement, one of the highest among the mutual fund companies that have settled with government authorities, Scannell's tip resulted in the ouster of Putnam CEO Lawrence "Larry" Lasser.

In fact, Scannell's testimony was a vital step in successfully bringing the first civil fraud charges against a mutual fund for market timing, a lawsuit that ultimately cost Putnam billions of dollars in lost assets and millions in fines. The move also sent shockwaves through the industry and emboldened New York Attorney General Eliot Spitzer to pursue similar suits against a number of other major mutual fund houses.

Scannell's information did not come without a price, however. A member of the Boilermaker's Union, one of the groups timing Putnam funds, allegedly assaulted Scannell with a brick, urging him to keep his mouth shut. To date, the assailant has not been apprehended. The attack has rendered him "physically and emotionally disabled," Autieri said, causing him to suffer from post-traumatic stress. Further, he claims that he has been blackballed in the industry and put under financial duress.

Scannell, who worked in Putnam's Quincy, Mass. call center, recently took a job in the corporations division of Secretary Galvin's office, where people register their companies, earning $45,000 a year. A lifelong drifter, Scannell has held a slew of different jobs around the country, including waiting tables and working at a casino.

At Putnam, he worked in the back office putting through trades and later received his series 7 and 63 licenses. While he is no longer on the Putnam payroll, Scannell was not fired nor did he quit. "The matter with Putnam is still unresolved," Autieri said.

Based on conversations with attorneys who handle false claims and whistleblower cases, Scannell has very little chance of success because he didn't go about it the right way. Had he been aware of the False Claims Act prior to the settlement, his case would have been a lot stronger, the lawyers said.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.