Compliance October 31, 2008

SEC Charges B/D Firm for Improper Gifts to Fidelity Employees

The Securities and Exchange Commission (SEC) charged privately held, registered broker/dealer Lazard Capital Markets LLC with failing to supervise three employees who spent more than $600,000 while 'improperly entertaining' traders at Fidelity Investments.
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According to a news release from the SEC, the traders were trying to generate brokerage business. The SEC also charged the three employees and a supervisor for their roles in securities laws violations by Fidelity traders.

Earlier this year, the SEC charged Fidelity and current and former executives and employees for improperly accepting lavish gifts provided by brokers. Among those charged were former Fidelity equity trader Thomas Bruderman.

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The agency’s orders issued Thursday found that David Tashjian, the former head of Lazard Capital Markets’ U.S. sales and trading department, and former registered representatives Robert Ward and W. Daniel Williams facilitated Bruderman’s violations of the securities laws by taking him on trips to such destinations as Europe, the Bahamas, the Caribbean, Florida, and Napa Valley, California, often by private plane, and paying for his meals and lodging at high-end restaurants and hotels. According to the orders, Bruderman also was provided with race car driving lessons, adult entertainment, and expensive wine, and approximately $50,000 was contributed toward his elaborate bachelor party in Miami.

The SEC also said that Tashjian and Louis Gregory Rice, former head of Lazard Capital Markets’ U.S. equity sales and trading desk, failed to supervise Ward and Williams during their misconduct.

“Mutual fund traders owe their loyalty and allegiance solely to the funds and their investors. When registered representatives provide mutual fund traders with prohibited travel, entertainment and gifts, it may impair their objective judgment and harm investors,’ said George Curtis, deputy director of the SEC’s Division of Enforcement, in the release.

Preventing Illegal Compensation

The SEC warned that brokerage firms must implement procedures to prevent employees from illegally providing compensation for brokerage business.

The SEC found that Lazard Capital Markets failed to supervise Tashjian, Ward, and Williams and detect or prevent their aiding and abetting violations of Section 17(e)(1) of the Investment Company Act. Lazard Capital Markets consented to the order without admitting or denying the findings, agreeing to be censured and pay disgorgement of $1,817,629 plus prejudgment interest of $429,379.04, and a penalty of $600,000, according to the SEC.

Tashjian, Rice, Ward, and Williams also settled the SEC’s charges without admitting or denying the allegations. The three were ordered to cease from committing or causing any further violations and will pay penalties of $75,000, $50,000, and $25,000, respectively, and will be suspended from associating with a broker, dealer, or investment company for nine months, six months, and three months, respectively. For his supervisory lapses, Rice was ordered to pay a $60,000 penalty and be suspended for a period of six months from associating in a supervisory capacity with any broker or dealer.


Compliance October 30, 2008

LaRue Bows Out of Legal Fight

A Texas management consultant, whose lawsuit over 401(k) fiduciary breach allegations became the subject of a landmark U.S. Supreme Court ruling on participants’ legal rights, has apparently run out of money to fund further proceedings.
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An agreement between James LaRue of Southlake, Texas and his former employer DeWolff, Boberg & Associates approved last week by a federal judge in South Carolina said LaRue had started pre-trial discovery after the case was returned to a trial court from the Supreme Court for proceedings on the merits of his claims.

In an order signed last week by Chief U.S. District Judge David C. Norton of the U.S. District Court for the District of South Carolina, the court said LaRue “decided that it is not financially feasible to continue to pursue his claim.”

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“Accordingly,” Norton wrote, “Plaintiff wishes to withdraw his claim and for this Court to dismiss this case.’ A request for comment to LaRue was not returned Thursday.

LaRue originally went to court to regain $150,000 that he charged was lost from his 401(k) account because the plan administrators twice disregarded his order to move funds to different investment options.

U.S. Supreme Court justices handed down a mid-February ruling eagerly awaited by the retirement services community that declared that defined contribution participants can bring fiduciary breach suits to recover individual damages (see Supreme Court Allows Individual ERISA Suits in Landmark Ruling). The LaRue finding became the basis of a series of related court cases in the following months (see Court Says LaRue Ruling Doesn’t Apply to ESOP Challenge).

In the October 21 order approving the settlement, Norton said that the legal statute of limitations has expired regarding the sequence of events LaRue claimed represented a breach of fiduciary responsibility under the Employee Retirement Income Security Act (ERISA) so “he would effectively be prohibited from refiling this lawsuit in the future in any event.”

The order dismisses the case “with prejudice”—a legal posture that precludes a case based on the same facts from being refiled. But Norton said, according to the settlement between the parties, LaRue can still go back to court for a new suit based on events taking place after 2002 if the new suit is not also past legal deadlines.

Neither side admitted any wrongdoing.

The order approving the settlement is available here.

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