It's all speculation, so I can't discredit 'he said, she said' at the moment. so...Per a poster on another board who claims to be a PSU booster:
In 1998 the University Park PD investigated allegations that he had fondled a young boy, turned everything they had over to the DA, and the DA did not prosecute. The investigation was sealed, and Joe Paterno and other administrators had no idea what happened, other than that he was investigated for some issue. Even with that little information, Joe Paterno told Sandusky that he would not become the coach at Penn State, and there are rumors he stopped him from getting the job at UVa. What transpired is that Sanduskey negotiated a retirement with Penn State brass that included Coach Emeritus status, that gave him free reign of Campus.
In 1998, Mike McQuery walked into the locker room, heard noises in the locker room, and saw Sanduskey behind a boy in the shower, both naked - for an instant and then ran. Next morning he talked Joe Paterno and relayed to him he thought he saw something strange, possibly of a sexual nature, happen in the locker room between Sandusky and a boy. Paterno immediately told Curley, and Curley and Schultz - who administers the Campus Police Department - came and interviewed Paterno to ask what happened. Joe relayed what he was told "fondling or something of a sexual nature" to them. From Joe Paterno's point of view, he not only told his superior, he also told the head of a police department. He had reasonable expectations the police would invesitgate the matter fully.
A week later Curley and Schultz interviewed Mcquery on what he saw. He told them he saw what he believed to be anal rape. They said they'd investigate. Again, from McQuery's point of view, he has reasonable belief that by telling Schultz, he's telling the police. A while later they call him (McQuery) back, telling him they reported to the Second mile and took away Sandusky's locker room keys. That's where the GJ stops." END QUOTE