N.Y. firm courted Fidelity traders with $2m in gifts

To woo business from Fidelity Investments traders, a New York brokerage firm showered them with pricey gifts such as private vacations and golf outings, tickets to a Justin Timberlake and Christina Aguilera concert, parties at the 2004 Super Bowl in Houston sponsored by Playboy and Maxim magazines, and a dozen bottles of Chateau Petrus wine worth $625 apiece.

The business arrived, but the new revenue came at a price.

Jefferies & Co., the New York brokerage firm, yesterday agreed to pay more than $10 million to settle regulators' claims that it had violated gift limits designed to ensure that brokerages compete for business fairly.

Jefferies did not admit or deny wrongdoing as part of the settlement. Fidelity was not charged with wrongdoing. But documents released as part of the deal spell out in detail about $2 million that Jefferies lavished on some of Fidelity's top personnel from 2002 to 2004.

The filings show that Fidelity substantially increased its business with Jefferies & Co. in the same period. Fidelity's commissions with Jefferies rose from $4 million in 2001 to $30 million in 2003 and $24.5 million in 2004.

In 2004, Fidelity acknowledged problems with some employees' acceptance of gifts and entertainment, which it said violated its policies. Fidelity has disciplined about two dozen people and strengthened its controls, spokeswoman Anne Crowley said yesterday. She said anyone whose decisions about where to send brokerage business were influenced by gifts or free travel was violating company policies, and no Fidelity customers suffered.

"We continue to believe that it is not possible to demonstrate that financial harm occurred to any Fidelity fund or client as a result of these excessive gifts or entertainment," Crowley said. She said Jefferies significantly improved and expanded its services during the period, which helped lead to the increased business .

The SEC is still investigating Fidelity's conduct, and the question now is whether the gifts and travel influenced Fidelity's decisions, said Jeffrey Haas, who teaches mutual-fund regulation at New York Law School.

"What it appears to be is simply an outright bribe" to get Fidelity's business, Haas said.

Asked about the investigation into Fidelity's conduct, Walter Ricciardi, deputy director of enforcement for the SEC, said it is continuing. But, he added, "Investors deserve, and the integrity of the market requires, that traders select brokers based on the quality of their trade execution and not on the lavishness of their gifts."

The documents show that, between 2002 and 2004, Jefferies paid $46,000 to fly one Fidelity trader and his wife to St. Thomas in the US Virgin Islands, more than $70,000 to fly another trader to Los Angeles for his honeymoon, and $75,000, including limousine service, to fly two traders to a Miami bachelor party.

Another filing shows a $225,000 golf outing in 2002 for traders that included Fidelity's head of equity trading, and $3,600 worth of tickets to the theatrical show "Hairspray" to a person identified as "Fidelity principal PL." Lawyers involved in the case said PL is Fidelity's former star fund manager, Peter Lynch. Lynch was not available to comment. Crowley said Lynch, now largely retired, has played no role in trading operations or directing any business to partners for 16 years.

Fidelity traders hold great influence on Wall Street because of the volume of business the giant firm generates. Traders are supposed to get the best prices for the lowest reasonable fees.

Securities industry rules prohibit brokers from giving gifts worth more than $100, and bar traders from receiving anything that could be construed as compensation for certain business decisions. In the documents released yesterday, the SEC alleges that those who accepted Jefferies' gifts violated a rule against taking such compensation, though the company has not been charged. Crowley noted that the settlement is not binding on Fidelity.

James S. Shorris, head of enforcement for the NASD, formerly the National Association of Securities Dealers, said an examiner spotted the excessive gifts during a routine review. A $38,000 expense for tickets to the Wimbledon tennis tournament in London in 2004 stood out, he said, and led them to question all of Jefferies's spending. The revelations led to a review of about 40 other brokerages, he said, but found that none of the firms had an entertainment budget approaching what Jefferies "directed at a single client," he said.

Jefferies's conduct, Shorris said, "threatens the integrity of the relationship between a brokerage firm and its institutional customer," which is obliged to find the best price possible for trades on behalf of its clients, the investors who buy shares of its mutual funds.

"When the trader for Fidelity receives these lavish gifts, it has the potential to color the trades" that they order, Shorris said.

An attorney for Jefferies, Bruce Baird, blamed the problems on Kevin W. Quinn, the broker who was its contact with Fidelity, whom Jefferies fired two years ago after learning of his spending from regulators. "There's no allegation that Jefferies knew about his improper activity," Baird said. The firm has cooperated with investigators, he said.

According to the filings, Jefferies hired Quinn in 2002 as a "rainmaker" for an annual salary of about $4 million plus a travel and entertainment budget of $1.5 million a year. Quinn, now 40, had developed good contacts at Fidelity after working at other financial companies in Boston including ABN Amro and a unit of Bank of America Corp., according to the documents and his attorney.

Quinn was aggressive in pursuing Fidelity's business. "I will do anything for an order (w/ my clothes on)," Quinn wrote to a Fidelity trader at one point, according to a filing. At another point he e-mailed a Fidelity trader that "I view private plane travel as one of the great perks of this biz and am more than willing to do it for a few guys when I can."

Exactly how much Quinn's overseers knew about how he spent the money is in dispute. The SEC charged that the company and Quinn's supervisor, Scott Jones, failed to properly supervise him. Baird, the Jefferies attorney, and an attorney for Jones both said they expected Quinn would spend the entertainment budget in smaller amounts for a wider range of Fidelity recipients. Jones also settled actions with both regulators, without admitting or denying wrongdoing, and agreed to pay $50,000.

An attorney for Quinn, Mike Tuteur, said that "The notion that Mr. Quinn was a 'rogue trader' is absurd." Tuteur said that Quinn's contract, including the entertainment budget, was approved by the president of Jefferies at the time, and that all of Quinn's expenses were approved by Quinn's supervisors.

Quinn agreed to pay $468,000 in penalties to a fund that could reimburse any losses Fidelity clients might have suffered, and to be barred from most parts of the securities industry. Quinn neither admitted nor denied wrongdoing.

Ross Kerber can be reached at kerber@globe.com.