SEC gives Fidelity second notice in inquiry - Regulator sees more potential civil charges over gifts to traders

By Andrew Caffrey, Globe Staff
September 23, 2005
The Boston Globe

Federal investigators notified Fidelity Investments yesterday they are looking at a second area of potential charges that they may bring against the mutual fund giant in connection with its traders accepting gifts and lavish entertainment. The US Securities and Exchange Commission also notified an unspecified number of traders and other individuals that they also may face charges for alleged violations, including receiving improper compensation in the form of gifts from brokerage firms, an attorney for one of the traders said.

Fidelity spokeswoman Anne Crowley confirmed the company had received another so-called Wells Notice from the SEC -- the second in three months -- but declined to comment on the specifics of potential violations. Crowley said the SEC notice is not a determination of wrongdoing, but rather an indication of what charges investigators may recommend the agency's commissioners bring against the company. Charges would have to authorized by the SEC's five-member commission.

''We intend to vigorously defend ourselves against any allegations we believe are not supported by the relevant facts and data," Crowley said. She said Fidelity has cooperated with the SEC investigation. An SEC official, Walter Ricciardi, declined to comment.

In July, the SEC told Fidelity it is considering bringing a civil fraud charge for its alleged negligence involving the gift-giving scandal. But that notification involved a lesser fraud charge in which the alleged violation was considered unintentional. Crowley said Fidelity is still preparing its response to the SEC's first notification, and will also respond to the agency's latest matter. It is unclear how many individuals were also notified yesterday that they may face charges as well, but the attorney for one of the traders said it appeared to be at least a half-dozen people.

The notifications are a major escalation in the near yearlong probe of Fidelity's trading desk, and the relationship its traders forged with brokers who wanted a piece of the fund company's potentially lucrative daily trading business. A federal grand jury in Boston is also hearing testimony about whether crimes were committed in the course of the gift-giving and entertainment bashes.

Fidelity, which has long promoted an image of probity under the leadership of chairman Edward C. ''Ned" Johnson III, has been stung by the disclosures of bacchanalian-like pursuits of its traders, who have cavorted with their broker friends during trips to exclusive golf courses, choice sports games, casinos, and other entertainment venues. Among the more notorious events was a weekend-long bachelor party for a trader, Thomas Bruderman Jr., in Miami's South Beach that was paid in part by the firms of brokers who handled trades for the company, according to attorneys involved in the case.

Securities rules generally prohibit brokers and traders from giving or receiving gifts over a certain amount. The notices of potential violations the SEC sent yesterday to individuals suggest that investigators believe the gifts were large and frequent enough to constitute a form of compensation the traders were not allowed to receive. It is not known whether any brokers also received notices yesterday from the SEC.

Fidelity also yesterday said it has tapped Brian Conroy, a 41-year-old securities-industry veteran, as its new head of global equity trading. He succeeds Scott DeSano, who was reassigned in the midst of the government's investigation.

While he helped build Fidelity's trading operation into one of the most efficient and feared operations on Wall Street, DeSano was among the 14 employees whom Fidelity disciplined last year for violations of company gifts policies. He was reassigned in July to a senior position in the company's Strategic New Business Development Group. Around that time he also received a notice from the SEC that investigators are considering charges against him too. An attorney for DeSano could not be reached for comment.

Crowley noted that Conroy's appointment is one of a number of changes that Fidelity has made to its stock-trading operation since the scandal became known last year. In addition to strengthening procedures within the department to protect against future occurrences, Fidelity earlier this year installed five new managers to supervise its trading operation.