ETF News

CORRECTED - Scandal hurts Lynch more than Fidelity-analysts

(Corrects paragraph 9 to show Peter Lynch is a vice chairman not a vice president)

BOSTON, March 6 (Reuters) - The reputation of Fidelity Investments’ most famous fund manager, Peter Lynch, will be hurt more by the scandal involving gifts from Wall Street brokers to staffers of the world’s biggest mutual fund company than Fidelity itself, analysts said this week.

Privately owned Fidelity agreed on Wednesday to pay $8 million, and Peter Lynch, who ran its main Magellan Fund from 1977 to 1990, agreed to pay about $20,000 to settle charges brought by the U.S. Securities and Exchange Commission (SEC).

The SEC charged Lynch, Fidelity and 12 other current or former employees with improperly accepting travel, entertainment and other gifts paid for by Wall Street brokers and accused Fidelity of allowing business to be swayed to these brokers.

“Far more damage has been done to Peter Lynch than the fine,” said John Bonnanzio, editor of independent newsletter Fidelity Insight.

Lynch’s involvement in the scandal came to light on Wednesday. However, many aspects of it were revealed a year ago after brokerage regulator NASD ended its probe into the matter and fined four Fidelity-affiliated companies $3.75 million.

Once known as America’s most successful fund manager because Magellan at times generated returns more than five times that of the Standard & Poor’s 500-stock index, 64-year-old Lynch 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.

“In asking the Fidelity equity trading desk for occasional help locating tickets, I never intended to do anything inappropriate, and I regret having made those requests,” Lynch said in a statement on Wednesday.

“I want the public to know that 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 is now a vice chairman at Fidelity.


In a preemptive move in 2006, Fidelity decided to pay $42 million to its mutual funds for the gifts taken by traders, taking the sting out of the SEC’s probe, begun in late 2004.

The company said in a statement on Wednesday that the SEC did not find that accepting the gifts caused financial harm to its funds’ shareholders.

“Fidelity was embarrassed by this, but it’s of minimal significance beyond the embarrassment factor,” said Jim Lowell, editor of independent newsletter Fidelity Investor.

Some analysts expected investors to be supportive of the Boston company, which last week reported record revenues of $14.9 billion and pre-tax income of $2.2 billion for 2007.

“In this business all sins are forgiven when you are making money for your clients,” said Bonnanzio of Fidelity Insight.

Fidelity Insight and Fidelity Investor are unrelated.

Both Fidelity and Lynch settled the SEC charges without denying or admitting them.

“It certainly does mar both of their reputations to some extent,” said Lou Harvey, president of research firm Dalbar Inc. But for Fidelity’s business, it was just a “pin-prick”, he said.

“The big effect is they are going to have to answer questions from people who operate pension plans and other kinds of institutional investments. So it will be more of an administrative burden than any strategic change,” said Harvey.

Closure of the gifts investigation was expected to remove a distraction for Fidelity management and help it to focus more on its core mutual funds business where it has lost market share to competitors such as Vanguard Group and American Funds.

According to funds flow research firm Financial Research Corp, Fidelity saw net inflows of $4.3 billion in its stock and bond funds in 2007 against $76.2 billion for Vanguard and $74.7 billion for American Funds.

“They have got that gorilla off their back, but it’s a jungle out there, and there will be plenty of other monkeys jumping on their back,” said Fidelity Investor’s Lowell.