SEC Probes Personal Trading At Mutual-Fund Giant Fidelity

WASHINGTON - The Securities and Exchange Commission is investigating Jeffrey Vinik, who runs the $56 billion Magellan Fund, and other fund managers at Fidelity Investments to determine whether they used Fidelity's market power to profit in trading stocks for themselves, according to government and legal sources.

Investigators are looking at the personal trading of at least three Fidelity fund managers besides Vinik, the sources said. They also are examining the trading of three former Fidelity employees, a former fund manager and two former analysts while they were at the firm, the sources said.

Typically, the SEC does not comment on its investigative activities. But in a statement today, the agency said "the article contains inaccuracies which have led to erroneous impressions." It didn't elaborate.

Sources told the newspaper that the SEC's enforcement division is trying to determine whether the fund managers and analysts traded stocks for themselves to benefit from subsequent buying or selling by Fidelity mutual funds, a practice called "front-running." Such trading could violate provisions of federal securities law prohibiting front-running and insider trading.

A spokeswoman for Fidelity said, "We are not aware of an SEC investigation into personal trading at Fidelity. During the broad consideration of personal trading issues that occurred in the 1993-94 period, the SEC staff talked to many investment companies, including Fidelity. We have not heard from the SEC on those matters in well over a year."

The SEC investigation began in 1994 but other matters took precedence, and it is difficult to demonstrate when front-running actually occurs, officials said. The probe has been given new attention in recent months, but there is no certainty that it will result in enforcement action, they said.

Fidelity, which has more than 100 stock funds, is the biggest, best-known U.S. mutual fund company, managing $428 billion for nearly 10 million customers.

The investigation also could affect the entire $3 trillion industry by focusing attention on the ethical standards of mutual funds.

Mutual funds pool the savings of individuals and put the money into a variety of stocks or other investments, spreading the risk for customers. The Investment Company Institute says more than 30 million households have mutual-fund accounts, either directly or through 401(k) and other retirement plans.

These investors can be affected if the personal trading of fund employees creates a conflict of interest - if, for example, a fund manager or analyst buys a promising stock for his own account before buying for his fund or recommending it to managers of other funds at his firm.

Huge trades affect prices

Besides Vinik, Fidelity managers whose trading is being scrutinized include Larry Greenberg, manager of the Emerging Growth and VIP Growth funds; Michael Gordon, manager of Retirement Growth; and Harris Leviton, manager of Advisor Strategic Opportunities Fund, sources said. "

The three former Fidelity employees are Larry Bowman, who now manages money for Soundview Financial Group Inc., in Stamford, Conn.; Jeff Feinberg, who assisted Vinik at Magellan and now is a managing director at Soros Fund Management in New York; and Steve Shapiro, now an analyst at Tiger Management Corp. in New York.

None of the fund managers or former Fidelity employees would comment.

A major focus of the investigation is the issue of whether any fund managers or analysts misused information about what other Fidelity funds were doing. Fidelity funds trade in huge quantities of stocks, and the demand created by this buying and selling can cause prices of the stocks involved to rise or fall. Someone knowledgeable about a fund's plans could profit by trading the same stocks ahead of the fund.

The SEC requires mutual funds to have a code of ethics. Fidelity's has always prohibited employees from using their knowledge of the funds' trading to profit personally.

`Millions' in personal accounts

Several former Fidelity fund managers said many managers and analysts actively traded for their personal accounts, and it was encouraged by senior executives.

Said one former fund manager, who left in the early 1990s: "Unless you were trading your own account like a maniac, you really weren't a player. That was the view held by most managers and that was not contradicted by superiors."

Another former fund manager who left Fidelity recently said the firm's management "didn't mind us getting rich in our P.A.'s because it made it more likely we would stay. . . They wanted gunslingers."

In a 1994 interview, Fidelity general counsel Robert Pozen said personal trading improves fund managers' skills and helps the firm retain top talent.

One source familiar with the matter said that investigators discovered early in the probe that Fidelity managers traded actively on their own behalf. A former Fidelity executive who has reviewed Vinik's trading records said that in one recent year he traded about 500 times for his own account.

Other sources who have seen his records confirmed that level of trading activity, and one said Vinik has "millions and millions" of dollars worth of stock in his personal account. Vinik, whose trading for Fidelity Magellan is widely watched and mimicked on Wall Street, is paid between $2.5 million and $5 million a year, according to former Fidelity managers. Information from Bloomberg Business News was included in this report.