US regulators moved on Monday to crack down on brokers who lavish gifts on mutual fund traders as they slapped $9.7m in penalties on Jefferies & Co, the New York securities firm, for currying favour with Fidelity traders.
The Securities and Exchange Commission and the industry regulator NASD said Jefferies, a middle-sized investment bank, hired Kevin Quinn as an executive vice-president in 2002 and gave him a $1.5m annual travel and entertainment budget to boost their institutional business.
He used the money to court five Fidelity traders, paying for private flights to Turks and Caicos, Bermuda and Puerto Rico, as well as vintage wines, golf outings, and trips to Wimbledon and the US Open tennis tournament.
He also paid $75,000 towards a lavish Miami bachelor party for a Fidelity trader. “Investors deserve and the integrity of the market requires that traders select brokers based on the quality of their trade execution and not the lavishness of their gifts,” said Walter Ricciardi, the SEC’s deputy enforcement director.
The regulators said the case was part of a broader effort to tighten policies that have let brokers funnel thousands of dollars in gifts and entertainment to institutional traders.
The NASD, which unearthed the problem, also issued a report urging firms to track entertainment and gifts more closely.
“We looked at 40 different firms that did institutional business and there was an industry- wide failure to track entertainment and gifts,” said James Schorris, head of enforcement at the NASD.
The firms routinely violated the NASD’s gift policy at the time, which limited gifts to $100. “We didn’t see any other firm that sank to the level of Jefferies but there is a lot of room for improvement,” Mr Schorris said.
Mr Quinn, who lost his job in October 2004 after his spending habits came to light, has been ordered to pay $468,000 in SEC penalties and barred from the securities industry for life, his lawyer said.
His supervisor Scott Jones was fined $50,000 and suspended from serving as a supervisor for three months. Since the scandal broke, Jefferies has instituted a “no gifts” policy for its employees.
“Jefferies has revamped its procedures and it is going to make sure nothing like this ever happens again,” said the firm’s outside counsel Bruce Baird.
“Jeffries chose to settle, rather than to litigate,” said Anne Crowley, a Fidelity spokeswoman. “This settlement is one where we played no role and had no say, this is not a settlement with Fidelity.”
She said that Fidelity had conducted its own investigation and taken strong disciplinary action against those employees found to have violated company policies.
Get alerts on Financials when a new story is published