So Neil and I believed that Madoff’s fall would cause a temporary disruption in the markets but that was all. There was no way we could have anticipated that Madoff’s fall would be caused by a worldwide recession that resulted in stock markets collapsing and led to investors desperately trying to pull their money from hedge funds to meet other demands. The moment a Ponzi scheme has to pay out more money than it is taking in, it’s done. But Madoff still had a few more years before we began to see signs of that.
While our investigation continued, all of our lives were changing. Over the next few years my wife and I had three children, which completely changed my perspective on the world. And Neil, who had started as my intern and become a trusted friend and collaborator, had decided to leave Rampart.
There were several reasons for his decision. After George Devoe’s death the dynamic had changed. Without him to act as a buffer for Neil and me, we really lost our voice within Rampart. Any input we’d had into the decision-making process disappeared, which at times caused some resentment. We also were forced into dealing with a trading group we didn’t particularly like, rather than the people we’d been working with for a while. But probably more than that, it was time.
Although Neil had been named a vice president and had a wide range of responsibilities, as long as he stayed at Rampart he was going to be my assistant and he had outgrown that role. At least partially because of our investigation, he’d become fascinated with hedge funds and hedge fund strategies. So when Frank Casey heard that the company he was raising money for, Benchmark Plus, was looking for a senior analyst, he tossed Neil’s hat into the ring. He thought it would be a perfect fit.
It was. In October 2003, Neil accepted the job and moved to Tacoma, Washington. A super-smart guy named Stu Rosenthal took his seat across the desks from me. In his new position Neil was responsible for interviewing potential hedge fund managers to be included in the Benchmark Plus portfolios and doling out funds for them to manage. It put him a position to meet even more people. So rather than our investigation being sidetracked, as we physically moved further apart, the pursuit of Bernie Madoff became the glue that held the team together.
Chapter 5
The Goddess of Justice Wears a Blindfold
If I needed a reminder of how potentially dangerous an investigation of the financial industry can be to a whistleblower, I got it in February 2003. An honest man named Peter Scannell was working in Putnam Investments’ Quincy, Massachusetts, call center, basically taking customer buy and sell orders. Eventually he realized that some of his customers were market-timing; at the end of the trading day, if the American stock market had gone up they bought mutual funds loaded with foreign stocks, figuring those stocks would rise when trading began in the foreign markets the next day. Many of those trades were being done by members of the Boilermakers Union. Although technically it’s not illegal, it’s a violation of the National Association of Securities Dealers regulations because it penalizes long-term investors, and most funds won’t accept trades from market timers. But when Scannell informed Putnam’s management, they reportedly ignored him. Although he was not supported by management, Scannell finally began refusing orders from the Boilermakers.
On a cold, snowy February night a few days later he was sitting in his car drinking a cup of coffee. He was parked in a dark church parking lot less than a dozen miles from my home. According to Scannell, a heavyset man dressed in a gray sweatshirt with “Boilermakers Local 5” emblazoned on it suddenly attacked him, hitting him in the head over and over with a brick, screaming that he’d better “shut the fuck up.” Scannell was left to die in that parking lot. Fortunately, a police officer found him lying there. At first he thought Scannell was drunk—it was only when he went to wake him that he saw the blood and rushed him to the hospital. Scannell barely survived. But I got the message: If a member of a local union had tried to kill Scannell over millions, it was not hard for me to imagine what organized crime would do for billions.
Ironically, this assault on Scannell changed my life, too. Scannell eventually brought his complaint about the market timers to the Boston office of the Securities and Exchange Commission (SEC). After waiting five months without any response, he finally went to Massachusetts Secretary of the Commonwealth William Galvin, who initiated an investigation that led to fraud charges being filed against Putnam, the resignation of its CEO, and the withdrawal of tens of billions of dollars by its clients. It also caused the head of the SEC’s Boston office, Juan Marcelino, to resign in November, several days after it was reported that the SEC had paid no attention to Scannell’s complaint. On September 9, 2003, New York State Attorney General Eliot Spitzer and Secretary of the Commonwealth of Massachusetts Galvin announced indictments against a number of hedge funds in New York and Putnam Investments in Boston for allowing market timers to steal returns from long-term fund shareholders.
The SEC’s Boston office was publicly humiliated and set out to rectify that by finding and prosecuting market-timing cases. And the SEC was willing to
