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Portfolio Manager Fined for Accepting Gifts

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  • Baker, John
    The Securities and Exchange Commission, in a formal opinion, has affirmed the initial decision of an administrative law judge that a mutual fund portfolio
    Message 1 of 1 , Aug 9, 2011
      The Securities and Exchange Commission, in a formal opinion, has affirmed the initial decision of an administrative law judge that a mutual fund portfolio manager wrongfully accepted gifts from brokerage firms with which the mutual funds did business. Release Nos. IA-3260, IC-29746 (Aug. 5, 2011). The gifts included tickets to sports and theatre events that were highly in demand, as well as expensive wines and hotel and vacation home accommodations. The manager's employer, FMR Co., and various co-workers previously settled related administrative proceedings, as did one of the brokerage firms and its account executive. However, fully litigated opinions of the Commission are considered to have more precedential value than do settled administrative proceedings.

      The SEC ruled that the portfolio manager's acceptance of the gifts violated Section 17(e)(1) of the 1940 Act, which generally makes it unlawful for certain investment company affiliates, acting as agent, to accept from any source any compensation for the purchase or sale of the investment company's property. The SEC ruled that the gifts were "compensation" to the portfolio manager because they were something of value to him, even when the gifts went to his boss. The portfolio manager argued that the Division of Enforcement had failed to show that the gifts ever resulted in the funds purchasing securities for other than the lowest possible price. The SEC ruled that, once it was established that the manager had a conflict of interest, the burden was on him to produce evidence that none of the gifts he received were in exchange for the brokerage business he distributed. This burden would not be met merely by showing that the funds always received the best price; Section 17(e)(1) is a flat ban on conduct tending to compromise the fiduciary judgment of affiliated persons, even in the absence of any bad intent.

      The SEC ordered the manager to disgorge over $140,000 for the gifts, plus interest. In valuing the gifts, the SEC used the amounts actually paid by the brokerages for tickets, which often were much higher than their face amounts. The SEC also ordered a civil penalty of $40,000, a censure, and a cease-and-desist order, but did not bar the manager from the industry. The SEC noted that, although there was no allegation that the manager acted with scienter (knowledge of wrong-doing), he must have known that the gifts he was accepting were difficult to acquire and of substantial value. The manager, who appeared pro se, has the right to appeal the SEC's order to a federal court of appeals.

      The Commission's opinion is available online at


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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