NASD fines brokerage $5.5 million for excessive gifts to Fidelity traders. Last week the NASD, a private-sector securities-business regulator, fined Jefferies, a New York-based investment bank and prime brokerage, $5.5 million for "providing improper gifts and excessive entertainment" to traders at Fidelity Investments. The NASD says the mischief occurred between 3 September 2002 and 11 October 2004.

Jeffries declined to comment on the action.

"The value of improper gifts and entertainment in this case is unprecedented," says NASD's head of enforcement James Shorris. "NASD's gift and gratuity rules were designed to prevent just the sort of conduct at issue here, which threatens the integrity of the relationship between a brokerage firm and its institutional customer. That this customer -- a mutual fund manager -- was itself a fiduciary only aggravates the already egregious circumstances in this case."

Munificence

In addition to the firm-level fine, Kevin Quinn, a trader at Jefferies, has been "barred from associating with any NASD-registered firm in any capacity," and his supervisor Scott Jones has been fined $50,000 and suspended for three months.

The NASD says that Jefferies hired Quinn in 2002 as an institutional sales trader in its equity unit and agreed to pay him an annual base salary of $4 million in 2002 and 2003, and $4.75 million in 2004. Jeffries gave Quinn an annual travel and entertainment budget of $1.5 million "to be used by Quinn and his team to entertain Fidelity traders to obtain order flow for" Jefferies' equity business, according to the NASD.

"Jefferies routinely and repeatedly reimbursed Quinn for gifts prohibited by NASD rules, which Quinn provided to Fidelity traders," the NASD adds.

NASD regulations limit the value of gifts that firms and associated persons may give to customers of the firm -- such as Fidelity and its traders -- to $100 per individual recipient per year.

Jefferies provided Fidelity traders with more than $1.6 million in "improper" gifts and "impermissible" entertainment, according to the NASD. The gifts included air travel, non-promotional sports-related merchandise and expensive bottles of wine. The entertainment included "lavish" trips, chartered flights, "expensive" hotel accommodations, weekend golf outings and tickets to the 2004 Super Bowl.

One Fidelity trader got a $38,000 junket to the Wimbledon lawn-tennis tournament in 2004, his third annual visit on Jeffries' dime; another enjoyed a $70,000 private-jet flight from Los Angeles to Boston, among other things.

More to come

Anne Crowley, a spokeswoman for Boston-based Fidelity, says the Jeffries settlement is the first phase in the resolution of "the investigations that began two years ago into broker-dealers providing excessive gifts and business entertainment to Fidelity traders beyond what is allowed" by the NASD. "Fidelity is not a party to the settlement, did not play any role in it and had no say in it," she writes in an email to FWR.

"About two years ago, Fidelity learned that certain Fidelity employees had violated our company's policies and procedures regarding gifts," Crowley adds. "We do not tolerate this type of activity at Fidelity and it is certainly not indicative of the company's ethics or business philosophy."

Following an internal investigation of the matter, Fidelity "took strong disciplinary action against the individuals involved, including sanctions, fines, suspensions, demotions, and, in appropriate cases, termination of employment," writes Crowley.

"We also took steps to make certain that the misconduct does not recur," Crowley adds. "We enhanced our policies and procedures related to gifts and gratuities and business entertainment, conducted extensive training and education of employees, and reached out to brokers that we do business with to make them aware of our new policies."

Fidelity says it believes "that it is not possible to demonstrate that financial harm occurred to any Fidelity fund or client as a result of these excessive gifts and entertainment" -- though it's keen to make clear it doesn't want "to minimize the seriousness of the misconduct at issue." -FWR

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