Brokers lavished traders with 'unlawful goodies,' class action says

Steve Gonzalez Aug. 21, 2007, 9:00am

A Trenton man filed a class action suit in federal court against Fidelity Management and Research and FMR Co. alleging they breached "best execution" obligations by steering transactions to brokers who lavished them with "unlawful goodies."

The suit alleges traders received perks such as expensive vacations, Super Bowl and Wimbledon tickets, and a Miami bachelor party that included "dwarf tossing and ogling strippers."

Plaintiff David Kurz claims the defendants are registered investment advisors who create, manage, and advise a number of investment portfolios including the portfolios he invested in.

"In managing portfolios, investment advisors like Fidelity and FMR have a duty to decide whether, in what amounts, and most pertinent, through which securities' brokers to purchase or sell securities," states the complaint filed Aug. 20 in U.S. District Court for the Southern District of Illinois.

Kurz claims commission and other execution costs paid by clients for the transactions can easily run into the tens of millions of dollars or more per year.

He claims concern over the execution costs of securities transactions is not a trivial matter and differences of even a few cents per share can quickly build to significant amounts considering advisers often trade in blocks of tens or hundreds of thousands of shares per transaction and may enter into a significant number of transactions per year.

"Given concerns regarding the cost of securities trading, transaction confirmations with executing brokers contain a 'best execution' obligation," the complaint states.

According to Kurz, that obligation forms a binding contract enforceable by him and the class, that required the defendants to choose execution brokers on the basis of the most favorable practicable execution costs, taking into consideration the size of each transaction, the number of transactions per year, the market impact of the transaction, brokerage commissions, services provide by the broker and other considerations.

Kurz claims there are a number of securities brokers from which the defendants could choose to execute transactions as long as they achieved "best execution."

"Unfortunately, Fidelity and FMR were not guided by their best execution obligations," the complaint states. "Rather, they became embroiled in a tawdry bribery scheme in which transactions were steered to brokers not on the basis of best execution but, instead, on the amount and number of unlawful 'goodies' that the brokerage firms lavished on Fidelity and FMR securities' traders."

According to the complaint, between May 2002 and October 2004, the defendants retained Jeffries & Co. as an executing broker in transactions they made on behalf of their investors.

Kurz claims during that time, Jeffries lavished a number of gifts on Fidelity and FMR traders including:

  • $47,000 to fly one trader and his wife to St. Thomas, U.S. Virgin Islands;

  • $70,000 to fly another trader to Los Angeles for his honeymoon;

  • $75,000, including limo service to fly two traders to a Miami bachelor party that included dwarf tossing and ogling strippers;

  • $225,000 for a four-day, three-person gold excursion to Las Vegas and Cabo San Lucas, including private plane flights and luxury hotel accommodations;

  • $125,000 for a Super Bowl weekend for two;

  • At least $334,000 for various private plane flights, mostly for weekend trips and vacations by traders; and

  • $90,000 for tickets to the Wimbledon tennis tournament for one trader over three years.

    "It is little wonder that Jeffries' revenue from Fidelity and FMR for transactions executed on behalf of investors like plaintiff and the plaintiff class ballooned from $1.7 million during the first six months of 2002 up to $24.5 million in business by September 2004," the complaint states.

    Kurz claims the defendants knew the practice of accepting gifts in exchange for transaction execution business was improper and unlawful and contrary to their "best execution" obligations but nonetheless knowingly entered into a common course of conduct where they directed transaction business to Jeffries based on payments and gifts in breach and total disregard of their "best execution" obligations.

    "Defendants' wrongful conduct resulted in higher execution costs than would have been realized but for the breaches of their best execution obligations," the complaint states. "In turn, these higher costs were ultimately borne by Fidelity and FMR investors, like plaintiff and the plaintiff class, causing them damage."

    According to the complaint, the chairman of the Fidelity Board of Trustees, issued an open letter to Fidelity shareholders explaining Fidelity has agreed to pay the Fidelity mutual funds $42 million plus interest to redress its misconduct.

    "The letter made no mention of compensation to the Fidelity mutual funds former shareholders who were injured as a result of Fidelity's breach of duty," the complaint states.

    Represented by Steven Katz of Korein Tillery in St. Louis, Kurz is asking the court to certify a class of all persons who were clients of the defendants at any time between May 1, 2002, and October 31, 2004, but subsequently liquidated their investments and terminated their agreements with the defendants prior to Dec. 21, 2006, and whose investment portfolios entered into at least one transaction in which Fidelity and FMR used Jeffries as the execution broker.

    The class does not specify the amount of damages sought, but claims the total amount sought exceeds $5 million.

    The case has been assigned to District Judge William Stiehl.

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