Say It Ain't So, Peter Lynch

Bringing new meaning to One Up on Wall Street, Peter Lynch has settled a civil case with the SEC involving inappropriate gifts. The claim alleged that Lynch instructed a pair of Fidelity traders to obtain tickets to dozens of events, including golf tournaments and a sold-out U2 concert.

Putting the Bono in pro-bono, the SEC fears that the actions set the wrong tone.

"If higher-ups request tickets from a trading desk, it may send a message to the traders that such misconduct is tolerated and could contribute to the breakdown of the compliance culture on the desk," SEC's Walter Ricciardi is quoted as saying in this morning's Wall Street Journal.

In other words, if brokers are sending Lynch off to go see the Ryder Cup or Irish rockers, there is the fear that he may be directing mutual fund trades their way, even if they're not offering the best deals for fund shareholders.

The SEC didn't suggest that orders were funneled in exchange for gifts. Terms of the $8 million settlement with Fidelity also stipulate that no one need to admit or deny any wrongdoing. It doesn't matter, though. The court of public opinion is free to jump to its own conclusions, and it'll likely tarnish Lynch's otherwise brilliant legacy.

Lynch became the fund industry's first rock star after turning the obscure Fidelity Magellan (FUND: FMAGX) into a market-beater. He then went on to author classic investing books like One Up on Wall Street and Beating the Street.

The timing of the settlement isn't ideal, since Fidelity is in the process of marketing the reopening of Magellan.

Still, this scandal is nowhere near as damaging as the rampant trading improprieties that snagged the mutual fund arms of companies like Bank of America (NYSE: BAC) and Janus (NYSE: JNS) five years ago.

As long as Fidelity's funds perform well -- as Janus funds have in the firm's comeback -- Fidelity will rise above the scandal.

The only problem with the settlement is that investors will be left with more questions than answers. Mutual fund investors are used to trusting others. They put their faith in both a money manager's acumen and ethics. Even in cases where investors seek research to ferret out the best funds -- like subscribers to our Champion Funds newsletter routinely do -- they're counting on the industry to do the right thing.

I wonder if U2 played "Vertigo" at Lynch's concert. Its lyrics may have been a warning of bad things to come:

"All of this can be yours.
Just give me what I want and no one gets hurt."