In March 2008, the Securities and Exchange Commission (SEC) initiated: In The Matter Of Scott E. Desano, Thomas H. Bruderman, Timothy J. Burnieika, Robert L. Burns, David K. Donovan, Edward S. Driscoll, Jeffrey D. Harris, Christopher J. Horan, Steven P. Pascucci, And Kirk C. Smith (Corrected Order Instituting Administrative And Cease-And-Desist Proceedings And Notice Of Hearing, Administrative Proceeding File No. 3-12978A, March 6, 2008)
Reduced to its basics, the SEC alleged in Paragraph 17 of its Order Instituting Proceedings that:
During the period from at least January 2002 through October 2004 ("the Relevant Period"), the Respondents in aggregate accepted more than $1.5 million worth of travel, entertainment and gifts from brokerage firms that sought and obtained orders to buy or sell securities on behalf of Fidelity's advisory clients. Those brokerage firms each received millions of dollars in commission revenue for handling orders from Fidelity's advisory clients' accounts. The respondents in aggregate accepted from brokers dozens of expensive trips, frequently by private jet, including excursions to the Super Bowl, family vacations to Bermuda, Nantucket and the Caribbean, golf outings at exclusive clubs in Florida and South Carolina, weekends in Las Vegas, lodging at fine hotels, and even an extravagant, three-day bachelor party for Bruderman in Miami. Brokers also provided the respondents with gifts including premium tickets to the World Series, the U.S. Open, Wimbledon, Rolling Stones concerts, and dozens of other sporting events and concerts. In addition, Bruderman accepted illegal drugs from brokers, and Driscoll's illegal gambling was facilitated by a broker, but neither Bruderman nor Driscoll disclosed that information to any manager at Fidelity.
Fidelity's 2006 Report
After being informed that some equity traders had accepted travel, entertainment and gifts from some brokers, the independent trustees of the Fidelity Funds retained a former federal judge to conduct an independent assessment of the adverse impact on the Fidelity Funds. His report, which was submitted to the independent trustees in November 2006, concluded that Fidelity clearly breached its duty to the Fidelity Funds to ensure that its traders acted solely for the benefit of the Funds. The report found that there was a substantial possibility that the traders' acceptance of the gratuities could have resulted in higher execution costs for the Funds. Report of the Hon. John S. Martin, Jr. To the Fidelity Independent Trustees Respecting Potential Harm to Fidelity Funds From Traders ' Receipt of Improper Travel, Entertainment, Gifts and Gratuities (November 16, 2006).
Pointedly, the report found that:
[T]he tainted brokers received $90 million more in commission business (net of soft dollar and expense reimbursements) from the tainted traders than they would have been expected to receive based on the amount of business sent to those same brokers by non-tainted traders . . .
As time progressed with the SEC's case, offers of settlement from the ten Respondents were made and eight were accepted. One offer from Respondent Bruderman is pending approval. In addition to any censures, cease-and-desists, or other sanctions agreed to by the eight settling and one pending respondents, the SEC imposed the following civil monetary penalties:
- DeSano : $125,000,
- Burnieika: $30,000,
- Donovan: $45,000,
- Driscoll: $30,000,
- Harris: $30,000,
- Horan: $30,000,
- Pascucci : $30,000, and
- Smith: $30,000.
Last Man Standing
Alas, Respondent Burns found himself alone, in the cold - the last man standing out of ten named respondents.
Burns, age forty-eight, was an equity trader at FMR Co., Inc., a privately-held, Boston-based corporation registered with the SEC as an investment adviser. FMR Co. is a wholly-owned subsidiary of Fidelity Management & Research Company and provides portfolio management services as a sub-adviser to certain clients of FMR, including the "Fidelity Investments" group of mutual funds, all of which are registered with the SEC as investment companies.
From at least January 1, 2002, through October 31, 2004 (Relevant Period), Burns was a sector trader specializing in technology stocks and reported to Respondent Donovan. Burns received orders from portfolio managers and could select brokers to handle certain securities transactions under certain circumstances, using a list of brokers that had been formally approved by Fidelity.
During the Relevant Period, Burns sent securities transactions to more than fifty brokerage firms, including the following: Robert W. Baird & Co., Fidelity Capital Markets, Instinet, LLC, Jefferies & Co., Knight Securities, Lehman Brothers, Morgan Stanley & Co., Needham & Co., Robertson Stephens, and Schwab Soundview Capital/Soundview Technology.
In divvying up his order flow, the SEC alleged that Burns willfully violated Section 17(e)(1) of the Investment Company Act by receiving travel, entertainment, and gifts from brokerage firms that sought and obtained brokerage business from Fidelity. The SEC alleged that on at least twenty-nine occasions, Burns improperly received travel, entertainment, and gifts from brokerage firms. In The Matter Of Scott E. Desano, Thomas H. Bruderman, Timothy J. Burnieika, Robert L. Burns, David K. Donovan, Edward S. Driscoll, Jeffrey D. Harris, Christopher J. Horan, Steven P. Pascucci, And Kirk C. Smith (Initial Decision As To Robert L. Burns , Initial Decision Release No. 412; Administrative Proceeding File No. 3-12978, January 18, 2011).
Following the rejection by the SEC of Respondent Burns' offer of settlement, the SEC Administrative Law Judge (ALJ) assigned to the case found no genuine issue with regard to any material fact and, accordingly, granted summary disposition against Respondent Burns (who represented himself pro se). The ALJ ruled that the SEC has shown by a preponderance of the evidence that Burns received travel, entertainment, and gifts (ill-gotten gains) in the amount of at least $135,281.45, as indicated in the table below.
|July 2002||Wimbledon Tickets (8)||Jefferies||$19,100|
|Sept. 2002||U.S. Open Tickets (2)||Baird||$3,700|
|Oct. 2002||Bruce Springsteen Tickets (4)||Jefferies||$800|
|Nov./Dec. 2002||Wine||Jefferies and Morgan Stanley||$5,893.22|
|Dec. 2002||"Hairspray" Tickets (8)||Jefferies||$3,610|
|Apr. 2003||Alvin Ailey Dance Company Tickets (4)||Jefferies||$700|
|Apr. 2003||Federal Cup Tickets (12)||Jefferies||$420|
|May 2003||"Lion King" Tickets (4)||Unidentified||$370|
|May 2003||Red Sox Tickets (4)||Soundview||$1,100|
|June 2003||Broadway Musical Tickets (4)||Lehman||$800|
|July 2003||Wimbledon Tickets (8)||Jefferies||$31,216|
|Aug. 2003||Justin Timberlake/Christina Aguilera Tickets (4)||Jefferies||$600|
|Aug. 2003||Cape Cod Home 1-Week Rental||Knight||$250|
|Sept. 2003||U.S. Open Tickets (8)||Jefferies||$7,200|
|Oct. 2003||Red Sox Playoff Tickets (4)||Soundview||$1,950|
|Dec. 2003||Wine||Jefferies and Morgan Stanley||$756.72|
|Jan. 2004||New England Patriots Ticket||FCM||$503.75|
|Jan. 2004||Waterville Valley Condo Weekend Rental||Knight||$300|
|Feb. 2004||"Moving Out" and "Avenue Q" Tickets (8)||Jefferies||$600|
Balancing the Scales of Justice
Having found Burns guilty, the ALJ then addressed the issue of sanctions. The SEC staff sought a cease-and-desist order, bars from serving with any registered investment company and association with any investment adviser, disgorgement of ill-gotten gains plus prejudgment interest, and a civil penalty for Burns' willful violations of the Investment Company Act. Burns argued for lesser sanctions.
The ALJ concluded that the proven violations were serious and recurrent over a period of almost three years. Although the ALJ conceded that Burns did not act with scienter, nonetheless, the ALJ concluded that Burns was not satisfactorily remorseful because he failed to fully appreciate the wrongful nature of his conduct. Specifically, the ALJ noted that Burns had attempted to diminish the seriousness of his violations by claiming that they were common practice at his employer.
Although the ALJ noted that Burns is unemployed, the judge expressed concern that at forty-eight years of age and with extensive experience as a securities trader, Burns had a possibility of a career with similar opportunities to purchase and sell securities on behalf of registered investment companies. The ALJ viewed such an opportunity as one that could provide Burns with the means to repeat the misconduct at issue. However, the ALJ acknowledged that the violations were not recent (now, nearly a decade old), and there was no evidence that Burns' acts harmed specific investors the market in general.
Accordingly, the ALJ's initial decision ordered that Burns:
- shall cease and desist from committing or causing any violations or future violations of Section 17(e)(1) of the Investment Company Act of 1940;
- is censured;
- shall disgorge $135,281.45 plus prejudgment interest
- shall pay a civil money penalty in the amount of $40,000.
The key victory achieved by Burns following the rejection of his settlement offer was that the ALJ did not impose a Bar but opted for the lesser "Censure." As such, Burns' sanctions are fairly consistent with the settlement offers from the other respondents.
Burns may file a petition for review (or to correct) an Initial Decision within twenty-one days after the service of the Initial Decision. The Initial Decision will not become final until the SEC enters an order of finality.
What does Burns say about Wall Street regulation when
- the underlying violations occurred in 2002, 2003 and 2004,
- the Martin Report was issued in 2006,
- the SEC first charges the respondents in 2008, and
- the last respondent's case is only now disposed of in 2011?
To the SEC's credit, a violation is a violation. Once a regulator starts picking and choosing what it enforces and who it goes after, it leaves itself open to second-guessing. However, it seems to me that historically, that's exactly what the SEC and other Wall Street regulators have done - it's what I frequently refer to as the "politics" of regulation.
Still, there is a nagging discomfort about this case. For three years - a considerable period as the ALJ underscored - Burns was accepting improper gratuities. Why were these violations not timely detected at the various firms - those who paid the improper gratuities and those whose employees received the gifts? Apparently both sides of that compliance equation failed here.
Then there is the issue of why it took the SEC until 2008 to charge violations that were ongoing as much as six years earlier and were fully analyzed in the 2006 Martin Report. Finally, why did Respondent Burns' case require nearly three years for the SEC to adjudicate?
Frankly, I suspect that if you add up all of the costs involved in the SEC's side of this case, you will find that it was grossly disproportionate to the $135,000 in gratuities received by Burns. However, to be fair, the SEC will likely point to the many respondents involved and correctly note that it received millions in gross monetary penalties from the respondents as well as from Fidelity (an $8 million penalty). http://www.sec.gov/litigation/admin/2008/ia-2713.pdf.
As I get older - and trust me, I'm getting quite older - I find myself rolling my eyes and shrugging my shoulders a lot more. I mean, what the hell, you got a bunch of cowboys trading stocks and they want to go see the Rolling Stones, the Boss, the Bosox, or Alvin Ailey (still pondering that last one). The way our society works, you get what you pay for - and sometimes we talk about greasing the wheels: a twenty to the Maitre D, ten bucks to the handyman, a two-for-one at the local coffee shop, a single malt to your banker at Christmas. Some see these as tips or promotions. Others see them as bribes.
What gets lost in the shuffle here is that the business that Burns "sold" was not his to sell - it was his employer's order flow and such sales likely imposed added costs on the public. Still, tag these trades as Fidelity's or point out that the payments gave an unfair edge to those firms who employed the brokers, it doesn't change the fact that it's life as usual on the Street - and Burns was certainly correct in making that assertion.
A lot of crap that goes on, on Wall Street. Most of it is wrong, if not illegal. On the other hand, you have to wonder what's worse: violating the rules or failing to timely prosecute those who engage in misconduct? At some point, lax regulation sends the mixed message that something's wrong but, hey, wattayahgonnado, fuggedaboudit. The challenge for regulators is to triage the many problems that present themselves and to focus the limited resources on attacking those wrongs that cause the greatest harm to the investing public.
One thing is for certain: Bringing a federal case six years after a violation and taking three years to prosecute the last respondent is not effective regulation. Too little, too late just doesn't cut it.