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2 more leave Fidelity amid probe

Traders depart as SEC examines gifts by brokers

Two more traders have left Fidelity Investments amid the government investigation into whether employees inappropriately solicited and received expensive gifts and entertainment from brokers who wanted the mutual fund company's massive trading business, the company confirmed yesterday.

Fidelity confirmed that Marc Beran and Steve Falzone left the firm late last week, but as is company policy, declined to say why, for employee confidentiality reasons. But they are the second set of traders who are now gone from the firm since the US Securities and Exchange Commission and Fidelity itself initiated investigations into the gift-giving activities between outside brokers and company traders.

Beran did not return calls seeking comment, and Falzone could not be reached.

Fidelity spokeswoman Anne Crowley also declined to say whether the company has taken additional disciplinary action beyond those it disclosed last month, when it fined or sanctioned 14 traders and said two others left after its own internal inquiry revealed violations of its gifts policies.

Among the employees Fidelity has fined is the prominent head of its stock-trading operation, Scott DeSano, according to attorneys involved in the case and news accounts. DeSano remains in his position.

Fidelity is the subject of a wide-ranging probe by securities regulators, one that has subpoenaed scores of brokers and traders in Boston's financial community. According to lawyers and others involved in the case, investigators are trying to determine if the gift-giving, which included fancy dinners, expensive wines, and trips to out-of-state golf courses and sporting matches, were the partying antics of a close, macho trader culture, or whether the Fidelity traders had in effect, a "pay to play" system, in which brokers who wanted a piece of the fund company's prodigious trading volume had to pony up presents.

One avenue of inquiry: Whether the Fidelity traders steered company trades to those brokers who gave them the best entertainment, and not necessarily the best price and service on stocks, as is required.

Regulators also are probing a number of relationships in which a Fidelity trader has a sibling who works at a brokerage firm that handles the fund company's trades.

As the world's largest mutual fund company, Fidelity's stock-trading is an enormous presence every day on Wall Street and in markets around the world, accounting for as much as 5 percent of the daily volume on the nation's two major exchanges. Though Fidelity is widely known in the industry for bargaining for low prices on its business, brokers said the sheer volume of trading can make doing business with the fund company profitable.

Fidelity has said its own investigation has uncovered no instances "where inappropriate and unauthorized behavior on the part of any individual has resulted in any financial loss to the Fidelity mutual funds or to any shareholder by adversely affecting the quality of executions received by the Fidelity funds on their trades," the company said in a Dec. 16 statement .

However, at the same time, Fidelity said the violations of company policies and procedures it discovered among its traders "caused us deep concern because we do not tolerate wrongful behavior."

One of the traders who has since left Fidelity is Thomas H. Bruderman Jr., who also is the 36-year-old son-in-law of disgraced former Tyco International Ltd. chief executive L. Dennis Kozlowski. Kozlowski has just started his second trial in a New York State court on charges he and an aide looted the industrial conglomerate. The first trial ended in a mistrial last year.

Among the episodes regulators are investigating in the Fidelity matter, according to lawyers and others in the case, is whether some brokers who did business with the company chipped in on, and attended an extravagant bachelor party for Bruderman in the weeks before he married Sandra Kozlowski at her father's Nantucket home in Sept. 2003, just before the elder Kozlowski's first trial was to start.

Bruderman could not be reached for comment.

SEC officials at the agency's Boston office also declined to comment.

In addition to taking sworn testimony of Fidelity traders, the SEC also has requested brokerage firms provide copies of their entertainment budgets for Fidelity, as well as other employee records "concerning gifts, gratuities, lodging and entertainment" provided by their employees "to any person employed by or affiliated with Fidelity," according to a copy of a subpoena obtained by the Globe.

Securities industry rules prohibit brokers from giving gifts worth more than $100. Fidelity's own policy bars employees from accepting gifts or entertainment outings intended to "influence a fund's investment decisions or trading activity."

And, Fidelity has said it has strengthened its policies and procedures in this area in the wake of the investigation.

"These changes include restricting the instances in which business-related gifts may be accepted from any company with which Fidelity does business, and requiring reporting of certain personal gifts and of business entertainment exceeding a certain threshold," the company said last month.

Andrew Caffrey can be reached at caffrey@globe.com.

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