Brokerage Patronage

A NYC investment brokerage, Jeffries and Co., has been fined $10 million for trying to land clients the old-fashioned way - by bribing them. It appears that in return for some nifty perks aimed at some top traders, Fidelity Investments seriously pumped up its business with Jeffries.

[D]ocuments show that, between 2002 and 2004, Jefferies paid $46,000 to fly one Fidelity trader and his wife to St. Thomas in the US Virgin Islands, more than $70,000 to fly another trader to Los Angeles for his honeymoon, and $75,000, including limousine service, to fly two traders to a Miami bachelor party.

And that party was quite an affair - according to the NY Post.

[Jeffries broker] Quinn booked a private jet and hired limos for the party in Miami; festivities included dwarf-tossing and ogling strippers. Danny Black, The Lansing, Mich.-based dwarf at the center of the party, confirmed to The Post that dwarf tossing was part of the activities. "What's a party without drunken dwarf tossing?" asked Black.

And it appears to have worked out as planned, at least before the chickens came home to roost.

Before the NASD caught Jefferies during a routine audit in late 2004, Quinn's obsessive entertaining and gift-giving catapulted Jefferies from $1.7 million in commissions with Fidelity in the first six months of 2002 to $24.5 million in business by September 2004.

When I hear something like this I immediately think that means some poor schmuck is getting screwed somewhere along the line, but Jeffries is not out scouting little old ladies with idle savings accounts. Sure, when your clueless uncle gets hoodwinked by some Merril Lynch hack into some crappy mutual fund with outrageous admin fees, you figure someone's getting some kickback somewhere along the line. Jeffries' clients are mid-size institutional investors. I guess in the end they're no brighter than your Uncle Mo?

And perhaps some good reader could help me out here - what exactly is the service Jeffries provided to Fidelity? It's not clear from the articles, but since Jeffries is a broker and Fidelity an asset manager, I would think the kickbacks would be going in the opposite direction - Fidelity bribing Jeffries brokers to sell their funds - so I'm a little at sea here.