Vanguard Managers Invested in Web Gambling, Suit Says

Andrew Harris of Bloomberg News is reporting, "Vanguard Managers Invested in Web Gambling, Suit Says."

Executives of Vanguard Group Inc., the second-biggest U.S. manager of stock and bond mutual funds, illegally invested client assets in companies running Internet gambling businesses banned in the U.S., according to a lawsuit.

Chief Investment Officer George Sauter, portfolio manager Duane Kelly and eight trustees violated U.S. racketeering laws and breached their fiduciary duties to investors by acquiring stock in the Web-based businesses, investors in two Vanguard- managed funds said in a complaint filed today in U.S. District Court in New York.

``Defendants caused the funds to become owners of illegal gambling businesses,'' according to the complaint. The plaintiffs seek class-action, or group, status on behalf of all similarly situated investors, plus unspecified compensatory and punitive damages.

...

The case is McBrearty v. The Vanguard Group, 08cv7650, U.S. District Court, Southern District of New York (Manhattan).

WSJ: Fidelity Snared in Auction Rate Securities Inquiry

Jennifer Levitz of the Wall Street Journal [subscription required] writes, "Inquiry Looks at Fidelity-Goldman Ties."

The New York attorney general's office is probing the relationship between Fidelity Investments and Goldman Sachs Group Inc. as part of its investigation into Fidelity's sale of auction-rate securities to individual investors, according to a person familiar with the investigation.

Investigators are looking at whether Fidelity's relationship with Goldman may have given Fidelity an incentive to sell the instruments, also called ARS's, this person said. The attorney general started focusing on the relationship after it learned that most of the auction-rate securities sold by Fidelity were underwritten by Goldman, this person said.

...

Regulators have been forcing Wall Street firms to repay customers. So far, a variety of firms have agreed to buy back $50 billion of the securities, and to pay $525 million in penalties. Last week, in a settlement with regulators representing 49 states, Goldman agreed to a $1.5 billion buyback from retail investors, and to pay a $22.5 million penalty to states. No firms have admitted wrongdoing in the settlements.

Goldman's agreement does not cover customers who bought auction-rate securities from Fidelity. Massachusetts's top regulator, William F. Galvin, has called on Fidelity to buy back all the securities it sold.

In a response to Mr. Galvin, Fidelity President Rodger Lawson said companies that underwrote the securities and oversaw the auction process should be "held responsible to provide liquidity for all purchasers of auction-rate securities, not just their own customers." The letter did not mention Goldman. Goldman declined to comment on the letter. Mr. Lawson's letter said that only a "very small percentage of investors bought auction-rate securities from Fidelity."

I have immense admiration for Fidelity as a company, and I am sure Fidelity will try not to let this tarnish its great reputation in the industry.

[emphasis added]