Probe is not a clear loss for Fidelity
boston.com | 3/7/08 | Ross Kerber
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 impropriety, 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. (Excerpt)