Prudential Securities Must Pay $1.9 Million in Arbitration Case

An arbitration panel handed down an exceptionally large judgment Tuesday--more than $1.9 million--against the downtown San Diego office of Prudential Securities, its former branch manager and two former brokers, for their unauthorized trading and churning of a retired couple’s accounts.

The award, by an American Arbitration Assn. panel, also was unusual because it included “exemplary” damages of $635,000. Exemplary damages, similar to punitive damages, are designed to make an example of a defendant. The damages Tuesday were the highest ever given by an arbitration association panel in a securities case.

In a brief statement, Prudential said it considers the award “unwarranted, incorrect and unsubstantiated by the facts.” It said it may appeal.

The case involves a Prudential office that has a history of problems, including two disciplinary actions by the National Assn. of Securities Dealers against David B. Utter, the former branch manager, for failure to properly supervise his brokers.

Although no longer branch manager, Utter is still a broker in the office. He and others were also the subject of internal disciplinary action following allegations in 1988 of money laundering at the office.

The arbitration award was brought on behalf of David and Virginia Smith, a retired Coronado couple, and was unrelated to the other actions.

The Smiths invested the proceeds from the sale of their garbage hauling business, more than $4 million, with Prudential, formerly Prudential-Bache, beginning in 1987. They maintained that they lost $1.5 million from the alleged mishandling of their accounts.

The Smiths contended in a complaint filed with the arbitration association that they weren’t sophisticated investors and that Prudential ignored their investment objectives, bought risky securities that generated big commissions for the firm and churned the accounts. Churning involves numerous rapid purchases and sales of securities solely to generate broker commissions.

The Smiths also maintained that Prudential made unauthorized trades and concealed losses from them, making it appear that they were making profits on their accounts.

Bradd L. Milove, one of the lawyers who filed the case for the Smiths, said he believes that the panel awarded exemplary damages in part because of the severity of the wrongdoing and because of what he described as an effort to cover it up. Milove also said “I think the arbitrators in this case took notice of the NASD (disciplinary action) against the branch manager and the recorded history of problems in the San Diego office.”

Exemplary damages are rarely awarded in securities arbitration cases. According to executives of the Securities Arbitration Commentator, a Maplewood, N.J., publication, the $635,000 in exemplary damages was the highest such damage award ever granted in California in a securities arbitration case.

They said the $1.3 million in compensatory damages and interest was also the largest amount ever reported in a securities arbitration case administered by the American Arbitration Assn. The association is one of several organizations, including the New York Stock Exchange, that provides arbitration services in securities disputes.

The arbitration panel, as is typical in arbitration cases, didn’t make specific findings in its decision, but it did rule that Prudential and the brokers violated federal securities laws and regulations.

The arbitration award penalized the firm itself $799,144 in compensatory damages and interest and $600,000 in exemplary damages. Utter was penalized $97,773 in compensatory damages and interest. He declined to comment.

Howard A. Rose, a former broker in the office, is to pay $112,000 in compensatory damages and interest and $25,000 in exemplary damages. Another former Prudential broker, Stanley W. Longworth, is to pay $288,000 in compensatory damages and interest, and $10,000 in exemplary damages. Rose and Longworth couldn’t immediately be reached for comment.