We all know money makes the world go round, and it is no surprise that stock brokers will do whatever they can to obtain order flow and execution business from institutional clients.
While in substantial part this may be old news, the Securities and Exchange Commission announced the amendment of a cease and desist order against certain traders associated with Fidelity Investments for conduct that of course took place more than six years ago in 2005.
The SEC’s findings, as more fully set forth in their final order, are however quite shocking, and certainly make interesting reading.
Fidelity is one of the largest mutual fund complexes in the United States. Its equity trading desk buys and sells millions of shares of stock every day for the Fidelity Funds and other institutional clients.
As an investment adviser, Fidelity has a fiduciary duty to seek best execution for its clients’ securities transactions and to disclose to its clients all material conflicts of interest.
Firms Shower With Gifts
During the Relevant Period, the respondents in aggregate accepted over $1.5 million worth of travel, entertainment and gifts from brokerage firms that sought and obtained orders to buy or sell securities on behalf of Fidelity’s advisory clients.
Stockbrokers, from a variety of firms, took these managers and certain traders, sometimes in groups, on more than thirty trips to such destinations as the Super Bowl, Las Vegas, Florida, the Caribbean, and Nantucket.
These excursions sometimes included travel by private jet, lodging at fancy resorts, entry to exclusive golf courses, tickets to major sporting events, limousine service, expensive dinners, other amenities such as spa services, and, for certain traders, adult entertainment and illegal drugs.
Lavish Travel and Entertainment Budgets
One broker even organized, and paid for, his own extravagant, three-day bachelor party in Miami, part of which the Fidelity managers attended and which cost brokers approximately $160,000.
Another brokerage firm, Jefferies & Co., Inc. gave one of its brokers, Kevin W. Quinn, a travel and entertainment budget of $1.5 million per year.
From that budget, Quinn entertained DeSano and several traders, primarily by taking them on weekend excursions by private jet.9 For example, Quinn organized an annual trip he called the “Fall Classic,” which included private jet travel, exclusive golf outings, lodging at expensive resorts, and other activities.
During the November 2002 Fall Classic, for example, Quinn took DeSano, Bruderman and Harris by private jet to Las Vegas. Quinn provided accommodations at the Bellagio Hotel, several thousand dollars worth of golf merchandise, a private band, meals, golf, and entertainment at a nearby strip club.
The group continued by private jet to Cabo San Lucas, Mexico, where Quinn provided accommodations in villas at the Esperanza Hotel, meals, more golf, and other entertainment. Jefferies paid approximately $200,000 for the expenses incurred on this trip.
Private Jets For Personal Use
On more than twenty other occasions, brokers made a private jet available for personal use by certain traders (and at times, their families), without accompanying the Fidelity employee on the trip. Some of the private jet trips were short (such as weekend excursions to Nantucket), but others were quite long (such as flights to Florida and the Caribbean) and cost brokers up to $50,000 or more per trip.
Exclusive Tickets To Large Venues
Besides the trips, brokers gave the respondents a total of approximately 900 tickets for some of the best seats at more than 270 sporting events, concerts, and other events, none of which the broker attended with the recipient.
The events included the World Series, prominent tennis tournaments (Wimbledon, the U.S. Open, and the French Open), Broadway shows, concerts by nationally-known performers (such as the Rolling Stones, Van Morrison, and Bruce Springsteen), and dozens of sporting events, including several Celtics, Patriots and Red Sox playoff games, numerous other Patriots and Red Sox games, several college hockey games.
In addition, stockbrokers sometimes offered illegal drugs to Fidelity’s managers . For example, in February 2002, a broker whom executed securities transactions for Fidelity clients sent one of the managers an email asking, “U want beans.” (Certain traders and brokers used slang such as “beans” and “Scooby snacks” to refer to ecstasy.) On other occasions, Fidelity managers solicited drugs from brokers.
The tainted brokers received $90 million more in commission business (net of soft dollar and expense reimbursements) from the tainted traders than they would have been expected to receive based on the amount of business sent to those same brokers by non-tainted traders.
As a result of the settlement with the SEC, one trader was “censured,” and the group was forced or otherwise agreed to repay the total of approximately $500,000.
Guiliano Law Firm
The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.