The Boston Globe reports the SEC said in the court filing that Fidelity “may have, directly or indirectly” defrauded some clients or prospective clients during a two-year period starting in 2002. The SEC said actions by Fidelity may have prevented customers from getting the best deals on stock trades.
Among other activities, the court filing revealed the SEC is investigating whether former Fidelity trader David Donovan Jr. or members of his family used inside information to profit from stock trades, according to the Globe. The SEC said, on August 5, 2003, Donovan accessed internal information which showed Fidelity had pending orders to buy nearly 2 million shares of Covad Communications Group Inc. Donovan accessed information about Fidelity’s trading plans for Covad over 40 times even though he had no responsibility for trading Covad shares at the time.
According to the court papers, following access to the information, Donovan placed calls to his parents’ home, and within 15 minutes of two of the calls, trades in Covad were credited to a brokerage account in the name of Donovan’s mother. The SEC said, during a three-day period in August 2003, a total of 55,000 Covad shares were bought for Donovan’s mother’s account for less than $2 per share. The shares were sold a month later for an $89,775 profit, the newspaper said. Prior to that, the last trades in the account of Donovan’s mother took place in 2001.
The court filings do not accuse Donovan, his parents, or Fidelity of improper or illegal activity. In March 2005, Donovan told the Globe his mother’s trades in Covad had nothing to do with him and he did not profit from them.
In December 2004, the Globe reported the SEC was investigating whether Donovan steered business to his brother Peter Donovan who handled Fidelity business at Banc of America Securities in Boston (See Globe Report Says SEC Probes Brotherly “Love”). The investigation also looked 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.