SEC Leadership is Key to Restoring Investor Confidence

By Jon Chesto
The Patriot Ledger
February 7, 2009

Watching Harry Markopolos of Whitman testify on Wednesday about his repeated efforts to expose Bernie Madoff reminded me of another whistle-blower who trekked from the South Shore to Washington to tell his story.

Almost exactly five years ago, Peter Scannell of Weymouth gave a blow-by-blow account to a Senate subcommittee of what he did to bring to light market-timing abuses in certain Putnam Investments mutual funds.

There are plenty of parallels between the situations. The two men live so close to each other, their kids could have played in the same baseball games last summer.

Like Markopolos, Scannell lived in fear of retribution after deciding to buck a system that helped make many people wealthy. They both displayed the tenacity and audacity that’s often necessary to expose financial wrongdoing when insiders look the other way.

And both men sought assistance from the Securities and Exchange Commission – and were sorely disappointed by the responses they received.

Markopolos went to the SEC nearly 10 years before Madoff’s alleged Ponzi scheme fell apart in December. Scannell approached the SEC in the spring of 2003, but he had to turn to Secretary of State Bill Galvin’s office before an enforcement action finally was pursued against Putnam. In fact, Scannell suspects someone at the SEC tipped off a Putnam exec, prompting the Boston fund firm to quickly change the names of the mutual funds targeted for market timing.

Now Markopolos and Scannell share something else: The SEC’s inspector general is probing the agency’s responses to both tipsters.

SEC Inspector General David Kotz confirmed to me on Friday that his agency has been in touch with Scannell and is actively conducting an investigation into his allegations. Kotz declined to provide any details about the probe.

Scannell also didn’t want to talk about the specifics of the investigation out of respect for the folks at the SEC who are listening to him.

Of course, there are some differences between the two cases as well. Scannell was a more traditional whistle-blower, in that he was drawing attention to wrongdoing within his own organization. Markopolos started his Madoff investigation while working for a rival money management firm.

Market timing, unlike a Ponzi scheme, isn’t necessarily illegal. But many mutual fund managers say that efforts will be taken to thwart rapid trading of fund shares. The practice can drive up expenses for long-term shareholders. Scannell says he had plenty of evidence that Putnam was actually encouraging certain favored investors – including members of a New York boilermakers union – to market time the funds.

Scannell had repeatedly gone to his supervisors at Putnam to air his concerns before contacting the SEC, according to the testimony he gave in Washington. Scannell’s efforts eventually landed him in Quincy Medical Center. Before going to the SEC in 2003, he was assaulted while drinking coffee in his parked car on a cold, snowy night. A burly, bearded man with a boilermakers shirt repeatedly smashed Scannell’s head with a brick, yelling at him about Putnam and knocking him unconscious.

Markopolos, meanwhile, went to great pains to keep his identity a secret because he was worried a criminal organization could be among those who would want to protect the Madoff scheme. He figured his safety would be jeopardized if the wrong people learned he was on the trail.

Scannell and Markopolos also share another trait: They both view white-collar crime as a potentially far more egregious offense than a stickup on the street with a gun.

Scannell says local police are usually equipped to chase down a low-level criminal – but it’s much more difficult to ferret out the ones wearing white collars. That can be especially true when the regulators who are supposed to protect us end up letting us down.

With the stock market downturn of the past year, many people are more jittery now about investing than they have been at any other time in their lives.

The SEC can play a crucial role in addressing this problem. In the coming months, the agency needs to show that the average investor can be protected from market-timing fund managers and Ponzi schemers. The country’s economy will never fully recover until that confidence is restored.

Jon Chesto is the business editor of The Patriot Ledger. He may be reached at jchesto@ledger.com. For online discussion, go to massmarketblog.com.

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