After three years of collecting e-mails and testimony detailing how Fidelity Investments' stock traders exchanged the firm's lucrative business for gifts, federal regulators came up with an $8 million penalty against the Boston mutual fund giant - pocket change for a company that had nearly $15 billion in revenues last year.
The Securities and Exchange Commission made a serious finding about a firm that prides itself on aggressively representing shareholders: that it failed to seek out the best deals on stock trades because its traders accepted lavish gifts, trips, and other goodies from brokers chasing Fidelity's lucrative commissions.
The SEC found that 13 current and former employees accepted $1.6 million in gifts and entertainment from these brokers. Three, including former star fund manager and now company director Peter S. Lynch, agreed to settle the charges with the SEC.
Yet in one key respect, Fidelity avoided a knock-down in the legal arena: Bad as they looked, the traders' shenanigans did not amount to much in the way of financial harm to mutual fund shareholders.
"It's a legal win for Fidelity," said Michael Goldstein, a Babson College finance professor. "This is a case where the SEC said, 'This looks like impropri ety, so we can't let you off the hook,' " but then failed to demonstrate that the impropriety had cost shareholders much money.
SEC officials would not comment beyond the documents released Wednesday. Still, Fidelity's public image as a paragon of rectitude was blackened by the sheer amount of misbehavior the SEC chronicled.
Weekend junkets, free tickets to plum sporting and musical events, bags of illegal drugs, and free cases of fancy wine - those were all part of the currency Fidelity traders received for directing the company's stock business to certain brokers.
W. Michael Hoffman, director of the Center for Business Ethics at Bentley College, said Fidelity now must demonstrate to its customers that it has taken stronger steps to enforce its ethics policies, which didn't stop the traders' gifts.
"Fidelity hasn't helped itself in building up trust," Hoffman said.
And though Fidelity ended its case with the government, the firm could still suffer embarrassing disclosures, as a number of its now former traders vow to fight the government's charges against them.
Fidelity said it has toughened its corporate policies on gifts and strengthened its oversight in this area. Most of the employees involved in the misbehavior are gone. The company agreed to settle its case without admitting or denying guilt.
Among the violations the SEC alleged: failing to supervise employees receiving gifts, failing to disclose its traders had a conflict of interest when choosing brokers for trades, and not keeping records of employees' outside e-mails.
The most serious charge was that Fidelity "willfully" violated its obligation to seek the best trades for investors. However, the SEC added an important qualifier: that, at best, the result of such a violation was a "substantial possibility" customers paid higher trading costs - not that they did, in fact.
The SEC has meted out much larger penalties in other high-profile mutual fund investigations, especially those in which it more directly established harm to investors.
MFS Investment was ordered to pay $225 million, Columbia Funds of Boston $140 million, and Putnam Investments $93 million for letting investors and fund managers rapidly trade in and out of mutual funds.
At Putnam, investigators determined shareholders suffered $4.4 million in losses associated with the market-timing trading.
Fidelity has agreed it will pay its own funds $42 million, at the behest of the funds' independent trustees, though a spokeswoman noted the trustees did not find proof shareholders were harmed. Fidelity also said that although the SEC did not find financial harm to the funds, "we do recognize the seriousness of the misconduct." All told, the case has cost it more than $70 million.
The SEC's investigation did unveil damning talk from the traders themselves.
One, Kirk Smith, complained in an e-mail to a colleague that two brokerage firms Fidelity used "are absolutely zero value-added on research and [market] intelligence, but loaded to the gills w/nepotism, incestual [sic] relationships, and issues of conflict."
The colleague, Steven P. Pascucci, responded: "I cannot poke a hole in that."
Both have been charged by the SEC. An attorney for Smith declined to comment. Pascucci's attorney said his client will contest the charges.
Another trader, Jeffrey D. Harris, complained in an e-mail to Kevin Quinn, a broker at Jefferies & Co. who provided many gifts to the Fidelity crew, that Jefferies' execution of trades on behalf of Fidelity was lowering Harris's overall performance.
Harris's attorney said his client did not violate securities laws and "received repeated and specific approval from his supervisors regarding the conduct that is the subject of the SEC's complaint against him."
Additionally, in a report by an independent consultant done for the Fidelity funds trustees that the SEC also released this week is an episode involving trader Edward Driscoll, who placed orders to purchase 8 million shares of Tyco International Inc. from an unnamed broker days before the broker flew him in a private jet to Houston to see the Patriots play the St. Louis Rams in the 2002 Super Bowl.
The trustees' report said Driscoll's choice potentially cost Fidelity as much as $18 million, when the broker failed to finish the trade before Tyco's stock price rose substantially that day.
Driscoll's attorney declined to comment.
Fidelity had argued that Driscoll's approach reflected only professional decision-making.
While the trustees' report acknowledged another broker might not have done any better, it states, "It remains probable, though, that Driscoll's choice of broker was influenced by [gifts and travel], and possible that Driscoll's choice resulted in poorer execution than could otherwise have been achieved."
Ross Kerber can be reached at kerber@globe.com.
