January 7, 2010 / 7:32 PM / 10 years ago

UPDATE 1-SEC review dismisses Putnam whistleblower concerns

* SEC inspector general finds no effort to shield Putnam

* Review follows complaints by key market-timing witness

* Second setback for former Putnam worker Peter Scannell (Adds details, information on departure of SEC Boston chief)

By Ross Kerber

BOSTON, Jan 7 (Reuters) - An internal review by the U.S. Securities and Exchange Commission found no evidence that the agency tried to protect mutual fund firm Putnam Investments from a whistleblower’s allegations, a rare pass for the battered SEC.

The review, conducted by the SEC’s inspector general and posted on the agency’s website on Thursday, does support past concerns that the SEC’s Boston office missed a chance to spot problems at Putnam that former employee Peter Scannell claimed early in 2003.

Putnam, like many other firms, later that year was caught up in an industry-wide scandal that cost it billions of dollars in lost assets. Regulators eventually found that Putnam turned a blind eye when employees and clients broke rules that prohibited the fast-paced buying and selling of mutual fund shares known as market timing. The Boston company settled with regulators for $193.5 million.

In his report, Inspector General David Kotz said his office did not find evidence of “staff misconduct” in how the SEC responded to Scannell’s concerns, as Scannell had claimed.

Nor was the departure of an unnamed official from the agency necessarily related to an effort to protect Putnam, Kotz said.

Kotz’s assessment was a softer takeaway than previous reports in which he blasted SEC officials for failing to pursue early tips about fraud committed by Bernard Madoff, who ran the world’s biggest Ponzi scheme.

The agency also missed signs that Texas billionaire Allen Stanford was possibly running a multibillion-dollar pyramid scheme.

Kotz’s report was released in response to Freedom of Information requests by Reuters and other media organizations. Much of it was redacted by agency reviewers, though, leaving an incomplete picture of what went wrong when Scannell first approached the SEC in 2003.

Even so the document marks a second setback for Scannell. Though he took a star turn testifying before Congress, Scannell failed in a legal bid to collect up to $15 million as his share of the money recovered by officials.

Scannell, who worked at a Putnam call center near Boston, first approached SEC officials in Boston in April 2003 with details of how his employer tolerated improper market-timing trades by institutional investors.

While not necessarily illegal, the practice can cost other shareholders money and was barred by fund rules.

When the SEC did not pursue his claims, Scannell later that year approached Massachusetts Secretary of State William Galvin, whose office regulates securities.

Galvin eventually charged that Putnam allowed investors and certain portfolio managers to market-time their trades, while the SEC only brought charges tied to the managers. A parallel probe by then-New York Attorney General Eliot Spitzer also tied other fund firms to market-timing activities. (A footnote in Kotz’s report also states Scannell says he spoke with Spitzer in August of 2003, though it doesn’t say what came of it.)

The pressure on Putnam led to the departure of its chief executive and, eventually, its sale to Canada’s Power Financial Corp (PWF.TO).

In an email to Reuters, Scannell said he would have no comment on the report at this time.

The SEC also took its lumps at the time, with the head of the agency’s Boston office, Juan Marcelino, departing amid criticism.

The publicly released version of Kotz’s report redacts the name of an official whose “departure from the SEC may have been related to the Putnam matter as Scannell claimed.” However, the report continues that Kotz did not find that the official “was forced to resign to protect Putnam.”

The official formally left the Boston SEC office on Nov 3, 2003, the report states. The date is the same as that of an agency press release announcing Marcelino would step down. (Editing by Matthew Lewis and Steve Orlofsky)

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