March 6 (Bloomberg) — FIDELITY Investments Vice Chairman Peter Lynch, former head trader Scott DeSano and 11 employees accepted more than $1.6 million worth of gifts from brokers jockeying to trade for the world’s largest mutual-fund company, U.S. regulators said.

FIDELITY will pay $8 million to settle the U.S. Securities and Exchange Commission’s claims, the agency said yesterday in a statement. The brokers’ inducements included a $160,000 junket to Miami, where bachelor party attendees were entertained by female escorts and supplied with ecstasy pills, the SEC said.

The settlement concludes a three-year probe that tainted the Boston-based money manager, known for policies aimed at protecting fund investors. The company failed to seek the best terms when trading for the funds because employees routed the transactions to brokers who doled out Super Bowl tickets and private-jet trips to Mexico, the SEC said.

“It was a highly embarrassing episode for Fidelity,” Burton Greenwald, a mutual-fund consultant in Philadelphia, said in an interview. “It created a real blemish on a reputation that it took them years to build.”

Ryder Cup Passes

LYNCH, FIDELITY VICE CHAIRMAN the former manager of the flagship Fidelity Magellan fund, received “numerous” free tickets to concerts, theater and sporting events from Fidelity’s traders, according to the SEC. He agreed to forfeit more than $20,000, representing the value of the gifts, plus interest.

Lynch, 64, said in a statement yesterday that he had asked the trading desk for “occasional help locating tickets.” Events included performances of “The Nutcracker” and the “The Lion King.” He also got 14 three-day passes to the Ryder Cup golf tournament at the Brookline Country Club in suburban Boston, where he had once been a caddy.

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Tyco Trade

The closely held company’s independent trustees fined FIDELITY $42 million in December 2006 after probing what Chairman Edward “Ned” Johnson IIIcalled “improper behavior.” Fidelity was founded in 1946 by Johnson’s father with $3 million in mutual-fund assets. The company now oversees $1.6 trillion and serves 24 million customers.

A report on the trustees’ 2006 investigation, released by the SEC yesterday, shows the amounts of money at stake when a Fidelity trader handed out an order to buy or sell.

In one case, a trader at the firm used a broker to buy 8 million shares in Tyco International Ltd., days before the broker flew him on a private jet to the Super Bowl in Houston in 2002, the report says. The trades cost the Fidelity funds as much as $18 million, though that may have been partly due to unexpected market events, according to the report.

“While no one can say that Fidelity could have obtained better execution from some other broker, the Tyco trade demonstrates the magnitude of the costs that the funds could incur” from one transaction that may have been influenced by a gift, the report said.

Marijuana, Concorde

Former Fidelity trader Thomas Bruderman, 39, allegedly received ecstasy pills and marijuana from brokers “on a number of occasions,” the SEC said in its complaint yesterday. It was his three-day bachelor party in Miami in 2003 that cost brokers $160,000, the agency said.

Another former Fidelity trader, David Donovan, 45, took 24 trips in which brokers covered most expenses, according to the complaint. Travel included at least two first-class flights on the supersonic Concorde airliner, it said.

DeSano, the 47-year-old former head trader, knew some orders were steered to brokers who provided entertainment, travel and gifts, or with whom Fidelity traders had family or “romantic relationships,” the SEC said.

The agency’s claims are still pending against DeSano, Bruderman, Donovan and seven other past and current employees.

DeSano’s attorney, Jeffrey Rudman in Washington, and Bruderman’s attorney,Thomas Kiley in Boston, didn’t return phone calls seeking comment. Donovan’s lawyer, Raipher Pellegrino, declined to comment.

Jefferies Settlement

The SEC and the NASD, now renamed Finra, fined brokerage Jefferies Group Inc.almost $10 million in December 2006 for plying Fidelity staff with gifts, including a party hosted by Playboy magazine, to win trading business.

Jefferies and its equity trading chief settled the case without admitting or denying wrongdoing. The regulators said Jefferies gave Fidelity traders chartered flights, bottles of Chateau Petrus wine, golf clubs, and tickets to events including the Wimbledon tennis tournament.

Jefferies spokesman Thomas Tarrant said at the time that the New York-based firm had “enhanced safeguards and supervisory practices.”

To contact the reporters on this story: Sree Vidya Bhaktavatsalam in Boston atsbhaktavatsa@bloomberg.net; David Scheer in Washington atdscheer@bloomberg.net.

Last Updated: March 6, 2008 00:12 EST