Who Leaked Fidelity's Trading Secrets?

The answer may help explain Daniel Frank's departure

A mystery has the mutual-fund world buzzing: Why did Daniel R. Frank suddenly leave Fidelity Investments? On Mar. 12, the veteran fund manager "resigned to pursue other opportunities," according to a company statement. The move was surprising because Frank was known as a loyal workhorse with an excellent track record running the $600 million Advisor Strategic Opportunities Fund, which he had headed since 1984.

Former employees of Fidelity say Frank was forced to leave after a security crackdown identified him as the alleged source of a leak of top-secret company documents--trading records of the $55 billion Fidelity Magellan fund. Publication of the data has led to lawsuits against the company by shareholders of Micron Technology Inc., who claim Magellan manager Jeffrey N. Vinik manipulated the stock by praising it in press interviews at the same time he was unloading it from his fund. Frank declined to comment. And Fidelity declined to comment on the circumstances surrounding his departure, citing the company's concern for employee privacy.

Those sources say Fidelity pulled no punches trying to uncover the origin of last fall's leak. After Magellan trading data appeared in The Washington Post on Dec. 1, Fidelity security and compliance personnel began reviewing phone and fax records and studying computer usage to see if they could identify who leaked the information.

Fidelity spokeswoman Jane Jamieson declined to discuss the specific practices to ensure security but left no doubt that the company works hard to prevent the public disclosure of such sensitive documents as trading records. "Because of our fiduciary obligations and regulatory requirements it's necessary for us to maintain a certain level of oversight of our investment activities, and this occurs at an individual level, the fund level, and the complex level," she says. "In all situations, we respect the privacy of our employees."

Inside Fidelity, "everyone's wondering who's looking over their shoulder," says a former staffer. Fund managers have since been barred from talking about individual stocks with the press, and the firm has stopped the widespread internal circulation of so-called daily night sheets, which detailed each fund's trades. Fidelity says it did so for security reasons.

MORE CONTROVERSY. After Frank's resignation, most Fidelity watchers speculated that he left the firm in the wake of an unrelated controversy: his fund's investment in I-Stat Corp., a tiny medical instrument company that was among his top holdings. Frank had made a personal donation of $5,000 to one Boston hospital so it could buy an I-Stat product, a handheld blood analyzer, and lobbied other hospitals to buy it as well. Fidelity defended Frank, saying there was no conflict of interest in his actions related to I-Stat. I-Stat recently acknowledged it is the subject of a Securities & Exchange Commission inquiry into its accounting practices, but there are no indications of a connection between Frank and the probe.

Despite questions surrounding his departure from Fidelity, Frank is still a hot property. "He has an excellent reputation in the business," says one headhunter, "and he's being courted by several top firms."

For more mutual fund information, go to keyword Morningstar.

Before it's here, it's on the Bloomberg Terminal.