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Compliance March 5, 2008
SEC Settles Charges Over Broker Gifts With Fidelity
The Securities and Exchange Commission (SEC) announced that Fidelity Investments agreed to pay an $8 million penalty in connection with charges 13 current or former employees improperly took more than $1.6 million in gifts by brokers.
Reported by Fred Schneyer
An SEC news release said the brokers, angling for a piece of Fidelity’s huge trading business, gave the accused employees a host of travel, entertainment, and other gifts paid for by the brokers. The gifts included private jet trips to Bermuda, Mexico, and Las Vegas and sports tickets to events including Wimbledon, the Super Bowl, and the Ryder Cup golf tournament.
Among the individuals charged was the well-known Peter Lynch, Fidelity’s trustee, vice chairman, and former portfolio manager of Fidelity’s flagship Magellan Fund, who settled the SEC’s accusations without admitting or denying the allegations.
The SEC’s order against Lynch found that he obtained numerous free tickets to concerts, theater, and sporting events paid for by outside brokers through his requests to two traders on Fidelity’s equity trading desk, causing those traders to violate an Investment Company Act provision that bars accepting compensation from outside sources when transacting on behalf of a mutual fund. The SEC ordered Lynch to cease committing or causing any further violations and to pay $15,948 in disgorgement and prejudgment interest of $4,183.
In its order also settled with Fidelity, the SEC charged that the firm failed to seek “best execution” for its clients’ mutual funds securities transactions. The agency alleged that Fidelity allowed the selection of brokers to execute those transactions to be influenced by lavish gifts as well as family and romantic relationships with brokers.
The SEC also censured Fidelity, ordered the firm to cease any further violations, and required Fidelity to hire an independent compliance consultant to conduct a comprehensive review of Fidelity’s current policies and procedures concerning equity trading operations, conflicts, and gifts. Fidelity also did not deny or admit the charges, the SEC said.
On December 1, 2006, the SEC brought a settled enforcement action against Jefferies & Co, Inc., its Director of Equities Scott Jones, and former Senior Vice President and equity sales trader Kevin Quinn in connection with Jefferies’ provision of extravagant travel and entertainment, and other lavish gifts to Fidelity equity traders to win securities brokerage business from the Fidelity mutual funds.
The SEC announcement can be viewed here.