Putnam Whistleblower Wants His Cut: Sues Mass. A.G. for $15 Million, Seeks Scandal Bounty'
July 11, 2005
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Originally enacted in 2000 in response to the state's Treasury scandal, the Massachusetts False Claims Act was designed to recover funds that were stolen through fraudulent means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.