Case $7\mathrm{.}6.$ The Trading Desk, Perks, and $$Dwarf Tossing$$

Wall Street firms dream of acquiring the trading business of a mutual fund like Fidelity Investments. Wooing those Fidelity traders during $2006$ resulted in at least one Wall Street firm, Jeffries & Co$.,$ going well over the $$100$ limit that the National Association of Securities Dealers $($NASD$)$ places as the upper edge for $$stuff$$ that can be given by investment firms to traders. The traders were wooed with, among other things:

A bachelor party in Miami for Fidelity Boston traders, complete with bikini$-$clad women, free charter flights from Boston to Miami that cost Jeffries $$31,000,$ and hotel suites with a party that included $$dwarf tossing$$

Trips to the Super Bowl, all free

$$19,000$ for Wimbledon tickets

$$7,000$ for U$.$S$.$ Open tickets

$$2,600$ for six bottles of $1998$ Opus One wine

$$47,000$ in chartered flights from Boston to the Caicos Islands

$$1,200$ for Justin Timberlake and Christina Aguilera tickets

$$1,000$ for a portable DVD player

$$500$ for golf clubs

Jeffries spent a total of $$1\mathrm{.}6$ million on $14$ Fidelity traders.

The SEC and the National Association of Securities Dealers $($NASD$)($now FINRA$$Financial Industry Regulatory Authority$)$ brought civil charges against Jeffries and required the firm to pay $$5\mathrm{.}5$ million in fines and $$4\mathrm{.}2$ million to disgorge profits made because of the gifts to the Fidelity traders. The SEC was able to tie the bestowing of the gifts to the timing of trades made by the Fidelity traders.

Fidelity disciplined the brokers when news of the bachelor party trickled back to Boston and the company began looking beneath the tip$-$of$-$the$-$iceberg party.

Following the Fidelity settlement for the employees, Peter Lynch$,$ one of the firm$$s principals, was investigated, and the SEC discovered that Mr$.$ Lynch was getting tickets to events such as the Ryder Golf Classic and U$2$ and Santana concerts. Lynch$$s eclectic tastes aside, he was earning between $$3$ million and $$10$ million per year when he solicited through Fidelity employees the $$15,948$ in tickets. Mr$.$ Lynch agreed to repay the value of the tickets plus interest of $$4,183$ and also expressed regret: $$In asking the Fidelity equity trading desk for occasional help locating tickets, I never intended to do anything inappropriate and I regret having made those requests.$$

Through his use of the Fidelity traders for tickets, Lynch placed his imprimatur on a system of getting and giving $$stuff$$ for Fidelity$$s trades. In addition to Mr$.$ Lynch$,$ other Fidelity traders and officers racked up $$1\mathrm{.}6$ million in goodies from brokers who were wooing Fidelity trades. One Fidelity trader commented, $$Word is out that the order flow is for sale.$$

The various reports Fidelity had prepared on the trader goodies and stuff from brokers concluded that the conduct resulted in $$adverse publicity, loss of credibility with principal regulators, and a loss of Fund shareholders.$$ The SEC noted, $$The tone is set at the top. If higher$-$ups request tickets from a trading desk, it may send a message that such misconduct is tolerated and could contribute to the breakdown of compliance on the desk.$$ It seems the leap from U$2$ concert tickets to bachelor parties with $$dwarf tossing$$ as entertainment is relatively shorter than most of those at the top realize.

Discussion Questions

Why should we worry about gifts now and then to traders? Aren$$t all investment firms about the same, offering the same levels of service?

Why do NASD, now FINRA, and the SEC worry about traders receiving stuff?

Can you draw a definitive line for your credo from this case?

What level of discipline would be appropriate for the Fidelity brokers? Was the discipline for Mr$.$ Lynch sufficient?

What signals did Mr$.$ Lynch$$s conduct send to the traders?