March 6, 2008 / 1:09 AM / 12 years ago

UPDATE 2-SEC charges Fidelity, Lynch in gifts probe

(Recasts with analyst comment, details of settlements)

By Muralikumar Anantharaman

BOSTON, March 5 (Reuters) - Star fund manager Peter Lynch of Fidelity Investments was charged on Wednesday in a widening gift-taking scandal involving brokers seeking to win business from the world’s biggest mutual fund company.

Boston-based Fidelity agreed to pay $8 million and Lynch, a vice-chairman, agreed to pay about $20,000 to settle charges brought by the U.S. Securities and Exchange Commission (SEC).

The SEC accused Lynch, Fidelity and 12 other current or former employees of improperly accepting travel, entertainment and other gifts paid for by Wall Street brokers.

It also ordered Fidelity to hire an independent consultant to review the firm’s policies on equity trading operations, conflicts and gifts.

Lynch, 64, has retired from managing funds at the Boston firm although he still plays a role at Fidelity mentoring new employees. He and Fidelity would not deny or admit the charges.

“Fidelity allowed the selection of brokers to execute those transactions to be influenced by lavish gifts as well as family and romantic relationships with brokers,” the SEC said.

From 1977 to 1990, Lynch ran Fidelity’s flagship Magellan Fund as it generated returns more than five times that of the Standard & Poor’s 500-stock index.

Lynch, once dubbed America’s most successful fund manager, relied on two Fidelity traders to procure 61 tickets worth $15,948 for various events from 1999 to 2004, the SEC said.

These included sold-out Ryder Cup golf tournaments, a Santana rock concert, and 11 tickets to see Irish rock band U2, according to the SEC.

Lynch’s spokesman, Doug Bailey, said Lynch generally gave away the tickets to family members and friends and only attended a Red Sox game and a golf tournament in 1999.

‘REGRET HAVING MADE THOSE REQUESTS’

“I never intended to do anything inappropriate, and I regret having made those requests,” Lynch said in a statement.

“I have never worked on the trading desk, and, since retiring from investment management at Fidelity over 17 years ago, I have not placed any trades on behalf of Fidelity with any brokerage firm,” Lynch said.

Other executives charged include Scott DeSano, Fidelity’s former head of global trading, and Bart Grenier, a senior vice president who supervised Fidelity’s equity trading desk.

“The broker selection process on Fidelity’s equity trading desk was compromised when gifts and lavish entertainment swayed the flow of brokerage business,” said Walter Ricciardi, deputy director of the SEC’s enforcement division, in a statement.

The charges are an embarrassment for Fidelity, a once-squeaky clean company which escaped industrywide scandals in 2003-2004 over market timing and late trading.

Fidelity agreed in 2006 to pay $42 million to its mutual funds for the lapses and said on Wednesday it had taken a number of remedial actions to prevent such behavior in future.

“Fifty million dollars is more than a slap on the wrist. It’s a real strong message to Fidelity,” said John Bonnanzio, editor of Fidelity Insight, an independent newsletter.

“It’s unfortunate that there are names like Peter Lynch and Bart Grenier named in this. Two individuals who clearly should have known better and been more careful,” Bonnanzio added.

Many aspects of the scandal were already previously disclosed, including the relationship with brokers from Jefferies & Co and Bank of America who plied Fidelity traders and high-profile managers with generous gifts.

In one instance, Jefferies in 2002 gave a Fidelity trader a private flight from Massachusetts to Bermuda costing $17,000. A year later it flew the trader to Los Angeles and Florida in trips worth $70,000 and $31,000, respectively, and gave the trader $500 golf clubs and a $23,000 flight to Puerto Rico.

Another Fidelity trader received Wimbledon tickets costing $19,000, eight bottles of wine at a cost of $5,900, tickets to a Justin Timberlake-Christina Aguilera concert costing $1,200, and $7,000 in U.S. Open tennis tournament tickets.

Additional reporting by Svea Herbst-Bayliss; Editing by Jason Szep, Richard Chang

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