SEC Investigating Magellan Fund Manager, Other Fidelity Workers

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 are also 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.

The agency’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,” the sources said. 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 proceeded slowly because other matters took precedence and because 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 could also affect the entire $3-trillion industry by focusing attention on the ethical standards of mutual funds--specifically on their rules on personal trading by employees and how well those rules are enforced.

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 funds have become the main investment vehicle for Americans, who have been pouring billions of dollars a month into stocks as they build up nest eggs for retirement.

Mutual fund shareholders need to be assured that any conflicts of interest between them and their investment advisor are disclosed or eliminated, according to a mutual fund industry report on personal trading published in 1994. Otherwise, the report said, customers may not receive the investment advice they deserve.

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 Fidelity spokeswoman said none of its fund managers would be available for comment and, “We don’t comment on the personal business of our employees. Any personal trading would have had to have been conducted in compliance with our code of ethics.”

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

The three said through their firms that they would not 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.

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

In 1993 and ‘94, Fidelity tightened the personal trading rules. The changes came after fund managers and analysts in several instances bought stocks for their personal accounts that later gained when Fidelity funds bought the same securities, according to former fund managers and analysts who were there at the time. Fidelity’s spokeswoman disputed the reason for the change, saying it was part of an ongoing review of the code of ethics.

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

“P.A. [personal account] stock tips were a regular part of water cooler conversation,” said one former Fidelity fund manager, who left in the early ‘90s. Like other former employees of Fidelity who were interviewed, the former manager, who still works in the investment field, agreed to speak only if not identified.

One source familiar with the matter said 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 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.