Globe Report Says SEC Probes Brotherly "Love"

December 13, 2004 ( - The Securities and Exchange Commission is investigating whether traders at Fidelity Investments improperly steered business to their brothers who work for brokerage firms that execute trades for the mutual fund giant, according to a report in the Boston Globe, citing attorneys and others involved in the case.

Named in the Globe report is David K. Donovan, 42, a trader at Fidelity Investments whose brother is Peter J. Donovan, 36, who handles Fidelity business at Banc of America Securities in Boston. The elder Donovan, who leads the group that deals in high-tech stocks at Fidelity, did business directly with his younger brother, among others at Banc of America Securities, according to the report.   And while it isn’t directly to deal directly with relatives, regulators are investigating whether shareholders in Fidelity’s mutual funds did not get the best deals on stock trades as a result.

Over the past month, the Securities and Exchange Commission has sent out dozens of subpoenas to Fidelity, its traders, and the brokerage firms that execute trades for it, according to the Globe – which yesterday reported that at least one brokerage has been asked by the SEC to disclose if any employees have relatives who work at Fidelity, citing attorneys familiar with the matter.

Broader Inquiry

The sibling connection is only one aspect of a broader inquiry into whether traders at Fidelity received free trips on private planes to Las Vegas, the Super Bowl, and golf courses in Florida, expensive wine, and other lavish perks from brokers who handled stock trades from the mutual fund company. Regulators are also trying to determine whether another half-dozen or so traders at Fidelity have siblings who work at brokerage firms, and if so, whether they improperly did business together.

Mutual fund companies are obligated to get the best possible deal on securities trades for their shareholders. Regulators are trying to determine whether the Fidelity traders instead shortchanged shareholders by steering business to brokers who gave them the best gifts or entertainment, or to family members, rather than to those firms which offered the fastest service at the best price.

The SEC subpoenas to brokerage firms ask for records of their entertainment budget for Fidelity, as well as employee expense reimbursements and other related documents, according to a copy of a subpoena made available to the Globe. A letter accompanying the subpoenas is titled, ”In the matter of Fidelity Investments trading practices” and was being sent pursuant to ”a formal order of investigation.”

In October brokerage firm Jefferies & Co. dismissed Kevin Quinn, its trader responsible for Fidelity business, over improper expenses.   The Globe says that attorneys and other people familiar with the case said Quinn gave lavish perks to his Fidelity counterparts.