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Brokers' Gifts Investigated

Regulators Look at Freebies for Fund Workers

By Carrie Johnson
Washington Post Staff Writer
Wednesday, November 24, 2004; Page E02

Securities regulators are opening up yet another front in their long-running investigation of the mutual fund industry, examining brokerage firms that allegedly gave mutual fund employees lavish gifts in exchange for business, officials said yesterday.

The gifts, which included Super Bowl and Wimbledon tickets, fine wine and flights in private planes, violate long-standing rules that limit brokers from spending more than $100 per year on a gift to a person who is employed by an entity with which the broker conducts business.

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Accepting such gifts also raises questions about whether mutual fund employees broke rules designed to prevent conflicts of interest, regulators said. The $7.6 trillion mutual fund industry has been under intense scrutiny for more than a year, since New York Attorney General Eliot L. Spitzer discovered that some fund companies allegedly helped big clients engage in abusive trading practices.

"Together with the NASD, we're coordinating a broad inquiry into whether excessive gifts were given to individuals who may have been influenced to steer business to these companies," said Lori A. Richards, director of the SEC Office of Compliance Inspections and Examinations. "Our concern is whether the self-interest of gift recipients may have trumped the best interest of fund investors."

Regulators declined to identify the brokerage companies and mutual fund employees under investigation, but they said the issue first came to their attention in a routine NASD examination of an unnamed brokerage house. The broader probe, which is in its early stages, has yet to determine how widespread the improper gift-giving practices may be.

"What is not at issue here is simple business entertaining," said Mary L. Schapiro, vice chairman of NASD, a self-regulatory group that oversees brokers. "We do not want gifts or lavish entertainment to influence business decisions. Fund advisers should place business with brokers based on their customers' best interests."

The current investigation comes a year after Morgan Stanley paid $50 million to settle SEC charges that the company failed to disclose secret sales commissions and other incentives -- including contests to win tickets to Britney Spears concerts -- that it awarded its own brokers in exchange for steering clients to funds controlled by Morgan Stanley.

Investigators said yesterday that they did not recall any previous cases against brokers for giving improper gifts to mutual fund employees.

But Barry R. Goldsmith, director of enforcement for the NASD, said the self-regulatory group's rule against excessive payments has come up in other high-profile cases in recent years.

For instance, the NASD charged former Merrill Lynch & Co. analyst Phua K. Young with giving a $4,500 case of wine to L. Dennis Kozlowski, then chief executive of Tyco International Ltd., at a time when Young issued research reports on the conglomerate.

And the NASD sued former Credit Suisse First Boston investment banker Frank P. Quattrone for doling out shares in hot initial public offerings to friends and business colleagues, reasoning that the shares amounted to an excessive gift.

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