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Wall
Street Star, Others Fined for Taking By Mark Jewell The Securities and Exchange Commission's order settles a long-running case against the nation's largest mutual fund manager, which was found to have accepted more than $1.6 million in perks from 2002 to 2004. The gifts included tickets to the Super Bowl and Rolling Stones concerts, private jet trips to exotic destinations, and fine wine and cigars, the SEC said. The agency said some Fidelity traders accepted illegal drugs and trips to strip clubs paid for by brokers, and one trader's illegal gambling was facilitated by a broker. In another case, a Fidelity equity trader organized his own three-day bachelor party in Miami, paid for by brokers at a cost of $160,000, the SEC said. "Brokers hired two women to entertain the attendees at the party, and provided a bag filled with illegal drugs (ecstasy pills)" to the trader, the SEC said. The investigation also found family and romantic relationships involving Fidelity employees and outside brokers influenced Fidelity's selection of brokers to handle trading business and receive millions of dollars in commissions. Three of those charged, including Lynch, agreed to settle without admitting or denying the allegations. Ten others are contesting the charges, which will be argued in administrative hearings similar to a court cases. The ten could face financial penalties and orders to give up ill-gotten gains, but not prison time. "The broker selection process on Fidelity's equity trading desk was compromised when gifts and lavish entertainment swayed the flow of brokerage business," said Walter Ricciardi, the SEC's deputy director of enforcement. "This misconduct created a serious risk of investor harm and violated Fidelity's duty of allegiance and loyalty to investors." The $8 million fine that Boston-based Fidelity was ordered to pay is in addition to $3.75 million that four Fidelity brokerage units were fined a year ago by the an industry self-policing organization now called the Financial Industry Regulatory Authority. And, after Fidelity ordered an independent review, the mutual fund manager said in December 2006 it would pay at least $42 million in penalties to its funds as punishment over gifts its traders received from brokers. Fidelity said in a prepared statement that by agreeing with the settlement, the company neither admits nor denies the SEC findings. "Although the order makes no finding of financial harm to our shareholders or our funds, we do recognize the seriousness of the misconduct found by the SEC," Fidelity said. At issue is whether investors may have paid higher costs because Fidelity directed trading business to brokerages that enticed Fidelity traders with gifts but not necessarily the best service. Mutual funds are required to disclose payments that might affect their decisions, and industry rules prohibit such gifts if they are worth more than $100. After the abuses surfaced more than three years ago, Fidelity disciplined more than a dozen employees. The case also led to an industry wide probe of gift-giving practices. In December 2006, Jefferies & Co. Inc. agreed to pay $9.7 million to settle regulators' civil charges that it illegally lavished nearly $2 million in gifts on Fidelity mutual fund traders. The SEC says Fidelity oversight was lax. "As one trader commented to another, 'Word is out that order flow is for sale,'" the SEC order said. Fidelity said it has worked to correct the problems that led to the abuses, and none of the individuals cited by the SEC remain on its trading desk. Most are no longer with Fidelity. The case against Lynch accuses him of obtaining free tickets to concerts, theater and sporting events paid for by brokers through his requests to two traders on Fidelity's trading desk. The order requires Lynch to pay $15,948 in allegedly ill-gotten gains, and interest totaling $4,183. A statement from Lynch said, "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." As manager of Fidelity's Magellan Fund, Lynch posted consistently market-beating returns in the 1980s. Magellan averaged a 29 percent annual return from 1977 to 1990 under Lynch. Since leaving as Magellan portfolio manager in 1990, Lynch, now 64, has served as vice chairman and a director of Fidelity's parent company. He was a trustee of Fidelity Funds from 1990 until February 2003. Along with Lynch, another former executive who agreed to settle the SEC's charges was Bart A. Grenier. The 49-year-old is a former Fidelity senior vice president who was responsible for Fidelity's equity trading desk and other business groups. The SEC found he accepted $38,500 worth of tickets to 21 concerts and sporting events. He was ordered to pay a total $51,316. Among the 10 contesting the SEC charges, one is a former executive, and nine are former traders.
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A Feast
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