Fidelity Investments yesterday agreed to pay an $8 million fine to settle federal charges that its stock traders improperly received gifts, including weekends of partying on private jets to golf and gambling outings, from brokers seeking the firm's business.
The Securities and Exchange Commission investigation also targeted 13 current and former Fidelity employees, including company officer and former star fund manager Peter S. Lynch, who regulators said received nearly $16,000 worth of free tickets to coveted events such as the Ryder Cup golf match and a U2 concert. Lynch settled with the SEC yesterday, agreeing to pay the value of the tickets, plus interest, to the US government. Two others also settled with the SEC, while 10 still face SEC charges.
The SEC said Fidelity traders failed to seek the best stock trades on behalf of its mutual fund customers because their choice of brokers was influenced by gifts. "Word is out that order flow is for sale," the SEC quotes an unidentified broker from an outside firm in an undated e-mail. Another broker e-mailed a proposed trade to a Fidelity trader in March 2003, and said, "Your prompt response will be rewarded w/ Celtic playoff seats. Thanks for caring."
Other gifts included tickets to World Series and Super Bowl games, Wimbledon matches, and Rolling Stones concerts and junkets to Las Vegas on private jets - some $1.6 million in gifts and entertainment that the SEC concluded Fidelity employees had improperly accepted from outside brokers from 2002 to October 2004.
Walter Ricciardi, the SEC's deputy director of enforcement and former head of its Boston office, said, "This misconduct created a serious risk of investor harm and violated Fidelity's duty of allegiance and loyalty to investors."
Fidelity agreed to settle the government's case without admitting or denying guilt. The nation's largest mutual fund manager previously said it would pay $42 million to its mutual funds - an amount determined by the funds' independent trustees - and make a comparable payment to institutional clients whose trades were handled by these employees.
In a statement yesterday, Fidelity acknowledged "the seriousness of the misconduct found by the SEC," but noted the government made no finding that its shareholders or funds were harmed.
Fidelity had already moved to fix the problems, including dismissing or disciplining employees, tightening company gift policies, and adding more oversight. Most of the 13 individuals involved in the investigation don't work at Fidelity anymore, the company said.
The rampant seeking and acceptance of gifts violated Fidelity's own policy at the time, which prohibited employees from making gifts a condition for a business transaction and barred them from receiving gifts worth more than $100 per year.
Fidelity's independent fund trustees had previously convened their own investigation, by former US judge John S. Martin Jr. In a report released yesterday by the SEC, Martin said that it was impossible to prove the traders' behavior hurt the mutual funds financially. But, once a trader accepted gifts, Martin said, "his desire to seek best execution" on stock trades "may have been compromised by the desire to reward the broker to whom he was indebted."
For the mutual fund giant, the settlement yesterday exposes a dark chapter, one of a culture of indulgence and entitlement within Fidelity's powerful stock trading desk. That behavior contrasted sharply with the image of Yankee probity projected by Edward C. "Ned" Johnson III, the firm's chairman and leader of the family that has long controlled the Boston institution.
The SEC said former Fidelity trader Thomas Bruderman and the brokers he did business with would refer in e-mails to illegal drugs such as ecstasy as "beans" and "Scooby snacks." One Fidelity trader, Edward S. Driscoll, had a broker at an outside firm deliver illegal gambling bets to a bookie and cover a $10,000 debt Driscoll owed to the bookie. Neither Driscoll nor Bruderman could be reached for comment.
The most notorious event involved a bachelor party for Bruderman. According to the SEC, brokers shelled out $160,000 in jet travel, luxury hotel rooms, a chartered yacht, and golf for the March 2003 binge in Miami.
The wild weekend included a bag of ecstasy pills provided to Bruderman, trips to strip joints, "adult entertainment" from two women whom the traders' supervisor believed were prostitutes, and such bizarreness as a "dwarf tossing" contest involving Danny Black, who runs a business called Shortdwarf.com and is hired to entertain at parties, according to the SEC documents and previously published reports on the party.
In July 2005, Black told the Globe in an interview: "Yeah, there were scantily clad women there on the boat. There was even a scantily clad dwarf. It was a party, and a bachelor party to boot. I knew they had a good time."
Bruderman left Fidelity in December 2004, as the SEC investigation was first publicly disclosed. The government found he received a total of $450,000 in travel and gifts from brokers. Bruderman's attorney was traveling overseas and could not be reached for comment.
The SEC also paints an unflattering portrait of the traders' boss, Scott DeSano, whom the government charged with failing to supervise his employees' compliance with federal rules on acceptance of gifts. Indeed, the government said DeSano personally compounded the improper atmosphere within the firm's trading operation by accompanying his traders on some of these trips, including the Bruderman bachelor party, and taking trips of his own at the brokers' expense.
An avid golfer, DeSano frequently was flown by brokers on private jets to exclusive golf outings in Florida, Georgia, and Nantucket, as well as other jaunts to Las Vegas and Mexico, the SEC said. So frequently was DeSano out of the office on trips, the SEC said, that he earned the nickname "the Owl," short for the rarely seen spotted Owl.
DeSano left his position in charge of Fidelity's trading desk in 2005, and the firm altogether last July. His attorney, Jeffrey Rudman of WilmerHale, said DeSano made reimbursements in the "overwhelming" number of cases when he received travel or benefits. "Where he didn't reimburse, there's a very innocent explanation," Rudman said, adding that the SEC has yet to prove any shareholders were harmed by the conduct.
Meanwhile, DeSano's former supervisor, Bart A. Grenier, also settled charges with the SEC that he accepted $38,500 worth of tickets to sporting events and concerts that came from outside brokers. Grenier reimbursed the brokers $14,348 for tickets in 2004. Yesterday, he consented to pay the government around $26,000, but did not admit to or deny the SEC charges.
Lynch's situation, meanwhile, was a clear departure from most of the improper behavior chronicled by the SEC, in that he wasn't part of the frat-boy partying around which the gift-giving was centered. Lynch, the SEC said, asked Fidelity traders to get him tickets for events, and was aware the tickets came from brokers who did business with the company.
In a statement yesterday, Lynch said, "In asking the Fidelity equity trading desk for occasional help locating tickets, I never intended to do anything inappropriate, and I regret having made those requests." In his settlement, Lynch did not agree to or deny the SEC charges.
Lynch retired from running Fidelity's Magellan mutual fund in 1990. He remains a director of Fidelity's investment arm, FMR Co.
In addition to Bruderman, DeSano, and Driscoll, others still facing charges include Timothy J. Burnieika, Robert L. Burns, David K. Donovan, Jeffrey H. Harris, Christopher J. Horan, Steven P. Pascucci, and Kirk C. Smith. Attorneys for several said their clients would contest the charges. Former trader Marc C. Beran agreed to settle with the SEC without admitting or denying the charges.