Where your mutual fund money is going (WSJ)

Short version: whores, private jets, and rented dwarves. P. Diddy is running your 401(k).

A Wall Street Affair: This Bachelor Party Gets Lots of Attention Probe Centers on Payments For Fidelity Star’s Bash; Private Jet to South Beach

By SUSANNE CRAIG and JOHN HECHINGER
Staff Reporters of THE WALL STREET JOURNAL
July 18, 2005

Even by Wall Street’s over-the-top standards, the March 2003 bachelor party for Thomas Bruderman, a onetime star trader for Fidelity Investments, was an event to remember.

The festivities began with a trip by private jet from Boston to a small airport outside New York City. There, the revelers picked up some Wall Street traders and at least two women who investigators suspect may have been paid for their attendance, say people familiar with the matter. The partygoers — including the groom-to-be, who was getting ready to marry the daughter of former Tyco International Ltd. boss L. Dennis Kozlowski — then continued to trendy South Beach in Miami. The fun included a stay at the ritzy Delano Hotel for some, a yacht cruise and entertainment by at least one dwarf hired for the occasion.

“Some people are just into lavish dwarf entertainment,” says the 4-foot-2 Danny Black, a part-owner in Shortdwarf.com, an outfit that rents dwarfs for parties starting at $149 an hour. Mr. Black says he spent part of the weekend on the yacht and worked as a waiter on the Friday night at a high-end Miami eatery alongside what he called “regular size” people. “A good time was had by all,” he said, declining to provide further details.

But what really made this a memorable party is that it is now a focus of an investigation into possibly improper gratuities from Wall Street trading firms eager to get Fidelity’s business. The National Association of Securities Dealers and the Securities and Exchange Commission are examining which Wall Street firms kicked in money for the weekend party. So far, at least three firms have been embroiled in the investigation. Jefferies Group Inc. paid for the plane, SG Cowen & Co. paid for the yacht, and Lazard Capital Markets paid for some of the hotel rooms, according to people familiar with the matter.

Meanwhile, the party now figures into a broader criminal investigation by federal prosecutors. The U.S. attorney in Boston has impaneled a grand jury to determine whether some of the money flowing from brokerage firms to Fidelity was used to pay for prostitutes and drugs at the party and other events, according to people familiar with the matter. Among other things, investigators are trying to determine if Lazard paid for prostitutes at the bachelor party, the people say.

Spokespeople for Jefferies and Lazard declined to comment.

Among the guests on the boat: Mr. Bruderman’s soon-to-be father-in-law, Mr. Kozlowski, then facing felony charges that he and a top lieutenant looted $150 million from Tyco to pay for their extravagant lifestyles. Mr. Bruderman’s wedding to Sandra Kozlowski later that year on Massachusetts’s Nantucket Island was on the eve of Mr. Kozlowski’s first trial, which ended in a mistrial. His second trial ended in a conviction earlier this year. Scott DeSano, then Fidelity’s influential head of stock trading, was an usher in Mr. Bruderman’s wedding and attended part of the bachelor party.

Now investigators have taken sworn testimony from guests at the bachelor party and are poring over receipts from that celebration. They are investigating whether favors bestowed on Fidelity traders and others influenced how Boston-based Fidelity, the nation’s largest mutual-fund company, with $1.1 trillion under management, doled out its trading business to Wall Street firms.

Mutual-fund companies are supposed to choose brokers based on service and price. NASD rules also prohibit brokers from giving or receiving gifts valued at more than $100. Fidelity has similar internal policies. The rule on entertainment is fuzzier. The NASD allows “ordinary and usual business entertainment” so long as it is “neither so frequent nor so extensive as to raise any question of propriety.”

One firm, Jefferies Group, paid for $75,000 worth of airfare to shuttle Messrs. Bruderman and DeSano and other non-Fidelity traders to the bachelor party, according to people familiar with the matter. A person familiar with the matter said SG Cowen, a unit of Société Générale SA, paid for the yacht party, which ran to almost $10,000.

People familiar with Mr. DeSano’s involvement said he did nothing inappropriate at the party, where he stayed for only a small part of the weekend. These people say Mr. DeSano has often reimbursed brokers out of his own pocket for expenses, including the jet trip to Florida. Mr. Bruderman’s attorney declined to comment. Anne Crowley, a Fidelity spokeswoman, said the company wouldn’t comment on an ongoing investigation. But, she says, the firm has policies that address issues like professional conduct and gifts and gratuities. “If we find that anyone violates those policies we take steps up to and including dismissal,” she said.

Last December, Fidelity disciplined 14 employees, including Mr. DeSano, related to its internal investigation of gifts and gratuities. Five, including Mr. Bruderman, have left the firm in connection with violations of its internal code of ethics. Mr. DeSano, 44 years old, was fined $50,000 for, among other things, failing to supervise his employees in connection to the entertainment they accepted. Earlier this month, he was reassigned to the company’s Strategic New Business Development Group as a senior vice president. Fidelity has declined to say whether the switch was connected to the investigations.

Fidelity says none of its investing clients have been harmed by these actions. Fidelity’s trading costs are half the industry average, according to Abel/Noser Corp., a firm that tracks such expenses. Mr. DeSano, in particular, was known for his aggressive efforts to squeeze brokers on Wall Street, saving hundreds of millions of dollars for shareholders.

In fact, many traders and their bosses complain that regulators have been focusing on picayune violations of gift policies, such as doling out tickets to sporting events or giving away the odd bottle of premium wine — long considered standard tokens of appreciation on the Street.

As part of the gift investigation, SEC investigators have recently questioned Edward C. Johnson III, Fidelity’s chief executive, about tickets he and his wife accepted from a Wall Street firm to attend a figure-skating competition at the 2002 winter Olympics. Choice seats for figure-skating events sold for as much as $400. The company has defended the receipt of the tickets as customary business entertainment.

The bachelor party is likely to be harder to defend. Photos of the weekend are circulating on Wall Street, including ones of men and scantily clad women frolicking on a yacht, according to three people who have seen them. In one picture, Mr. Kozlowski is standing with a dwarf on the boat, according to people familiar with the situation. Mr. Black, the dwarf who worked at the bachelor party, wouldn’t say who paid him for his services that weekend, or how much he was paid. Representatives of Mr. Kozlowski couldn’t be reached for comment.

Regulators have been able to piece together some of what happened that weekend and on other occasions through interviews with participants and by reading email and other electronic communications.

In one electronic exchange made over a trading terminal, then-Lazard trader Robert Ward asked then-Jefferies trader Kevin Quinn how the two of them planned to “T&E” Mr. Bruderman’s wedding — using Wall Street lingo for travel and expense. “Creative T&E…again.” he responded, according to a person who has reviewed the exchange. Mr. Ward declined to comment. Gerald Walpin, a lawyer for Mr. Ward, said his client’s actions were “appropriate.” He said his client expensed a handful of hotel rooms to his firm that weekend and everything that was expensed was fully disclosed to his employer. Mr. Quinn, through his Boston lawyer Mike Tuteur, declined to comment.

In addition to the bachelor party, Fidelity traders are under fire from regulators for accepting other expensive gifts including trips to the Wimbledon tennis championships, Las Vegas and the Super Bowl in private jets.

In recent weeks, a number of former Fidelity traders have received so-called Wells notices from regulators. These are warnings that regulators may file civil charges and give firms or individuals a chance to defend themselves. Fidelity says the firm has received no such notice, nor have any current employees.