The National Association of Securities Dealers today announced that it has fined Jefferies & Company Inc. for lavishing too many gifts on Fidelity traders.

The firm was fined US$5.5 million for providing more than US$1.6 million in improper gifts and entertainment to equity traders employed by FMR Co. Inc., an investment advisor to the Fidelity family of mutual funds, between Sept. 3, 2002, and Oct. 11, 2004. The improper gifts to those Fidelity traders exceeded US$600,000 and included private chartered air travel, non-promotional sports-related merchandise and expensive bottles of wine. The impermissible entertainment totaled more than US$1 million and included lavish trips, private chartered flights, expensive hotel accommodations, weekend golf outings and tickets to the 2004 Super Bowl.

As part of the action announced today, the NASD also permanently barred former Jefferies trader Kevin Quinn from associating with any NASD-registered firm in any capacity. It also fined Quinn’s former supervisor, Scott Jones, US$50,000 and suspended him for three months from associating with any NASD-registered firm in a supervisory capacity. He is also prohibited from supervising business entertainment, gifts or travel for the next two years. NASD also ordered Jefferies to retain an independent consultant to conduct a comprehensive review of the firm’s policies, procedures and training relating to gifts and entertainment, and to adopt recommended improvements.

Jefferies, Quinn and Jones settled the actions without admitting or denying the allegations, but consented to the entry of NASD’s findings.

“The value of improper gifts and entertainment in this case is unprecedented,” said James Shorris, NASD executive vice president and head of enforcement. “NASD’s gift and gratuity rules were designed to prevent just the sort of conduct at issue here, which threatens the integrity of the relationship between a brokerage firm and its institutional customer. That this customer — a mutual fund manager — was itself a fiduciary only aggravates the already egregious circumstances in this case.”

The NASD found that in 2002, Jefferies hired Quinn as an institutional sales trader and agreed to pay him an annual base salary of US$4 million in 2002 and 2003, and US$4.75 million in 2004. The firm also provided him with an annual travel and entertainment budget of US$1.5 million to be used to entertain Fidelity traders to obtain order flow for the Jefferies Equity Division. The firm routinely and repeatedly reimbursed Quinn for gifts prohibited by NASD rules, which Quinn provided to Fidelity traders.

NASD rules limit the value of gifts that firms and associated persons may give to customers of the firm — such as Fidelity and its traders — to US$100 per individual recipient per year.

The NASD also found that despite the exceptional annual travel and expense allowance it gave Quinn, Jefferies failed to establish and maintain an adequate supervisory system, including adequate written supervisory procedures, to ensure reasonably that Quinn did not use the budget in violation of NASD rules. Moreover, Jefferies, acting through Jones, failed to supervise reasonably Quinn’s use of the travel and expense budget.

Following a two-year review of industry gifts and gratuities practices by registered firms, the NASD also issued a notice to members today, to provide guidance for complying with gifts and gratuities rules.