Fidelity is fined $8 million over improper gifts
Days at Wimbledon. Nights at U2 concerts. Flights aboard the Concorde.
And a dwarf to toss.
Wall Street brokers were willing to give all that and more to win lucrative business from Fidelity Investments, the worlds largest mutual fund company.
But on Wednesday those lavish gifts caught up with Fidelity, which agreed to pay $8 million to settle regulatory claims that current and former employees - among them Peter Lynch, the investor behind its Magellan Fund - had accepted improper gifts in exchange for business.
Lynch, a vice chairman of Fidelity, was among 13 employees accused by the U.S. Securities and Exchange Commission of accepting gifts from brokers. Over the years, he had asked Fidelity traders to secure tickets from brokers to 12 concerts and sports events, including shows by the rock bands U2 and Santana and a pass to the 1999 Ryder Cup golf tournament, the SEC said. Fidelitys self-imposed limit on gifts to its employees is $100.
Lynch, who ran the Magellan fund until 1990, agreed to pay a fine equal to the value of the tickets brokers had given him over the years - almost $16,000 - plus interest.
“In asking the Fidelity equity trading desk for occasional help locating tickets, I never intended to do anything inappropriate, and I regret having made those requests,” Lynch said in a statement.
The investigation into Fidelity, initiated more than three years ago, trained a harsh spotlight on the high-priced perks that have long greased business on Wall Street.
Money managers like Fidelity direct billions of dollars in securities trades to brokerage houses that reap commissions by executing the transactions. To get fund managers business, brokerage firms shower money managers with expensive gifts. There is a lot of money at stake: From January 2002 to October 2004, Fidelity alone generated $2.3 billion in commissions for brokerages.
Under securities laws, mutual funds like Fidelity must seek out the best prices when they trade securities. The Investment Company Act prohibits fund employees from accepting compensation from outside sources who act on behalf of funds, like brokers who executes trades.
The SEC, however, cited not only Fidelity traders for infractions, but also senior executives.
“The tone is set at the top,” said Walter Ricciardi, deputy director of enforcement at the SEC. “If higher-ups request tickets from a trading desk, it may send a message to the traders that such misconduct is tolerated and could contribute to the breakdown of the compliance culture on the desk.”
The SECs complaint paints unflattering portrait of Fidelitys trading desk in recent years. Under Scott DeSano, the former head of global equity trading, Fidelity traders routinely accepted gifts in return for directing lucrative trades to brokers, according to the SEC.
DeSanos lawyer did not return a call seeking comment on Wednesday.
“Word is out that order flow is for sale,” an unnamed Wall Street broker wrote in an undated e-mail message to another broker in reference to Fidelity, according to the SEC complaint.
Between January 2002 and October 2004, the SEC complaint says, Thomas Bruderman, then a trader at Fidelity, received $450,000 worth of travel and entertainment from brokers who, among other things, helped pay for Brudermans bachelor party in Miami. The festivities reportedly included chartered yachts, lodging at the Delano, a luxurious hotel, and a dwarf-tossing competition.
Bruderman also received “thousands of dollars” worth of wine, a cigar-filled humidor worth $1,300 and 30 tickets to at least seven events, including the U.S. Open and front-row seats at a Dave Matthews concert.
Bruderman, who left Fidelity in December 2004, has denied the allegations. His lawyer, Thomas Kiley, was traveling in Africa on Wednesday and did not respond to an e-mail message for comment.
E-mail communications among the traders at Fidelity and their brokers, disclosed by SEC, suggest the employees knew they were breaking the rules.
In one, DeSano says, “What happens when I get fired for this?” A broker responds, in e-mail shorthand, “. . . no one is allowed 2 say anything . . . Last yr never got out . . . If someone talks, we kill.”
The SEC said the gifts influenced the way Fidelitys traders directed their trades. In December 2003, for example, Steven Pascucci, a former equity trader at Fidelity, asked a broker for courtside tickets to that nights NBA Celtics game. When the broker offered four tickets, Pascucci explained where to deliver the tickets and responded, “Thks. Buy 50K,” meaning 50,000 shares, according to the SEC. Pascuccis lawyer could not be reached.
Fidelity said Wednesday that the SECs findings make “no finding of financial harm to our shareholders or our funds,” but added, “we do recognize the seriousness of the misconduct found by the SEC.”
