Fidelity Trader's Fete Widens Gift Probe: But Fund Giant Should Emerge Unscathed: Experts
July 25, 2005
Just when the mutual fund industry was ready for a breather from 20 months of intense regulatory scrutiny and costly new compliance measures, along comes Danny Black.
With his admission to the media last week that a number of key traders from Fidelity Investments enjoyed a lavish Miami bachelor party two years ago - one where his company, shortdwarf.com, provided part of the entertainment - the four-foot, two-inch Black may have set in motion a second round of sweeping investigations from the Securities and Exchange Commission and the NASD.
Not to mention a whole new batch of rulemaking from the top two federal regulatory bodies that takes a harder look at allowances for what's widely known on Wall Street as "soft-dollar marketing support," where brokerage houses will spend up to 10 basis points of the value of the block of trades on client entertainment.
As to what drove the brokers and their Fidelity clients to such excess, one former fund wholesaler, speaking off the record for MME, commented: "The trading basis has come down from 4 cents a share, to 2 cents, to 1 cent or less, [and] it has become a commodity business. Traders today will do a lot more to protect their business."
"Considering who is involved and the names that are involved, this isn't going to go away anytime soon," said Nancy Van Sant, a former SEC investigator and director at the Miami law firm of Sacher Zelman & Van Sant.
The story, according to news reports, goes like this. In March of 2003, brokers from three of Wall Street's premier houses - Jefferies Group, SG Cowen and Lazard Capital Markets - collaborated on throwing a bachelor party for one-time Fidelity trading all-star Thomas Bruderman, Jr. The brokers reportedly expensed to their firms a private jet, posh hotel rooms and a yacht soiree, all of which would be in violation of longstanding NASD gift rules.
Bruderman left the firm late last year during an in-house disciplinary sweep over gifts and gratuities, which has gone so far as to implicate Fidelity Chairman Ned Johnson and firm heir apparent Abigail Johnson for accepting tickets to high-profile sporting events (see MME 7/4/05). Also caught in the sweep was head trader Scott DeSano, who was recently reassigned within the company (see MME 7/18/05).
DeSano also attended the bachelor party, news reports said, but it's been suggested that he may have reimbursed the brokers for travel expenses out of his own pocket, which would sufficiently soothe SEC and NASD regulators. In an ironic twist, another reported party attendee was Bruderman's then-future father-in-law, former Tyco International Chairman and CEO L. Dennis Kozlowski, who was recently convicted of using company money to throw lavish parties of his own and sentenced to 25 years in jail.
Throw in Black's coy admission that "a good time was had by all," and suddenly the probe shifts from a rather innocuous investigation into Wall Street's old-boy network to one that may rival its market-timing and late-trading predecessor, which has already cost fund complexes $3.4 billion in fines and brought down scores of the industry's most talented professionals.
Issue a Memo
"It could go that far," Van Sant warned. "All they need to do is indict one person. As we've seen in the past, everyone wants to make a deal. Nobody wants to go to jail," she added. "If I were general counsel somewhere, I'd be sending out memos regarding this today."
The NASD, which has been cracking down on gifts linked to sales contests, wouldn't elaborate on whether it has spoken with officials at the three brokerage houses involved in the Bruderman bachelor party.
"We cannot comment on an investigation. We don't discuss that," said NASD spokesman Herb Perone.
The SEC isn't elaborating on the extent of its investigation at Fidelity, either. Reports are circulating in Boston, however, that the U.S. Attorney General Office has convened a grand jury to examine rumors that drugs might have been traded between Fidelity and the brokerage houses. A spokeswoman for the office, Samantha Martin, said she "cannot confirm or deny an investigation" is afoot.
What is clear, however, is that if the brokerage firms picked up the tab on the company dime, heads will roll. NASD rule 3060 prohibits gifts "of value in excess of $100 per individual." But in a 1999 guidance letter to T. Rowe Price Investment Services, elaboration on the rule did not limit what it characterized as "ordinary and usual business entertainment."
"Payment of travel expenses, for instance, by a third party would be in violation of the NASD rule, so there's likely to be some fallout from that," said Victor Siclari, a partner at the law firm Reed Smith in Pittsburgh. "And that letter is an exception people rely on for the occasional golf outing. This is much more excessive."