Compliance

Fidelity to Pay $42M into Funds After Report Reveals Brokers' Gifts to Traders

Fidelity Investments has announced it will pay more than $42 million to its funds after a report issued by independent trustees of Fidelity’s board said some of its traders directed business to brokers who provided them with lavish gifts.
Reported by Rebecca Moore

Reuters reports that chairman Edward Johnson apologized to investors in an open letter and said the company will pay “$42 million plus interest to Fidelity Mutual Funds based on an allocation formula to be agreed to with the Independent Trustees.”

In a statement, Fidelity said it “took strong disciplinary action against those individuals involved in this misconduct, including sanctions, fines, suspensions, demotions and, in appropriate cases, termination from employment. Those responsible for the most serious misconduct have long since left the firm or been reassigned to projects outside the trading desk.’

In 2004, the Securities and Exchange Commission (SEC) began a broad inquiry into whether traders at Fidelity received free trips on private planes to Las Vegas, the Super Bowl, and golf courses in Florida, expensive wine, and other lavish perks from brokers who handled stock trades from the mutual fund company, including the brokerage firm Jeffries Group, Inc. Earlier this month, the SEC also revealed for the first time details of its two-year probe into possible fraud at Fidelity Investments (See More Details Emerge in Fidelity Fraud Probe). Also this month, the NASD announced it had slapped Jefferies & Company with a $5.5-million fine for providing “improper gifts and entertainment” to Fidelity stock traders (See NASD Fines Jefferies $5.5M for “Improper Gifts’ to Fidelity Traders).

The report said it is statistically impossible to prove whether fund investors were cheated during the gifts and gratuities scandal, but certain Fidelity traders had “misdirected” order flows among brokerage firms, according to Reuters. Additionally, the report said “inadequate supervision and other shortcomings exposed the Funds to the potential risks of adverse publicity, loss of credibility with their principal regulators and loss of Fund shareholders.”