Fidelity to pay $8 million to settle charges of accepting improper gifts

Fidelity Investments agreed today to pay an $8 million fine to settle charges that its stock traders improperly received gifts and entertainment, including private jet travel to golf and gambling outings and illegal drugs, from brokers seeking the firm's business.

Among those named in the US Securities and Exchange Commission's three-year investigation is Fidelity vice chairman and former star fund manager Peter S. Lynch (right), who used the firm's traders to obtain nearly $16,000 worth of free tickets to prize entertainment events, including Ryder Cup golf matches and concerts such as U2 and Santana.

The SEC said Fidelity traders failed to seek the best deals on behalf of its mutual fund customers because their choice of brokers for making trades was influenced by the kinds of gifts and other goodies those brokers gave them (read the press release here). The government said the traders and Fidelity employees improperly accepted $1.6 million in gifts and entertainment from outsider brokers from 2002 to October 2004.

"The broker selection process on Fidelity's equity trading desk was compromised when gifts and lavish entertainment swayed the flow of brokerage business," said Walter Ricciardi, the SEC's deputy director of enforcement and former head of its Boston office, said today. "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 today without admitting or denying guilt. The nation's largest mutual fund manager had previously refunded its retail customers $42 million after an internal report found the company had failed to adequately supervise these traders. In today's settlement, the SEC disclosed Fidelity had agreed to refund another $10 million to its institutional clients.

In a statement, Fidelity acknowledged "the seriousness of the misconduct found by the SEC," but noted the government made no finding its shareholders or funds were harmed by the activity.

The firm noted that it had previously taken numerous steps to fix the problems, including dismissing or disciplining some of the traders involved, tightening the company's gift policies and adding more oversight to its trading operation. All of the 10 traders involved in the investigation no longer work on the firm's trading desk, and most don't work at Fidelity any more, the company said.

The full text of the ruling is here; the ruling on Lynch can be read here, as well as the attorney's report.

Read previous Globe coverage of the Fidelity investigation here.

(By Andrew Caffrey, Ross Kerber, and Beth Healy, Globe staff)