Prudential Agrees to $365-Million Settlement : Securities: Unlimited restitution is part of bid to end SEC probe. Package would be third-largest in U.S. history.

Seeking to end a swarm of government fraud investigations, Prudential Securities has tentatively agreed to pay at least $365 million, including an unlimited amount of restitution to customers, sources involved in settlement negotiations said Thursday.

A restitution fund will be established with an initial commitment from Prudential of $320 million, the sources said. The money will go mainly to several hundred thousand investors nationwide--including tens of thousands in California--who put $7.7 billion in dozens of limited partnership programs that Prudential marketed aggressively throughout the 1980s.

The brokerage will also pay fines totaling $45 million.

Sources close to the negotiations said the SEC is expected to continue with a second phase of its investigation focusing on possible action against individual executives, including some who are still senior officials at Prudential, the nation’s fourth-largest brokerage.

Several states also are likely to bring civil disciplinary charges against current and former Prudential executives, state regulators said, declining to name any of the executives involved.

The sources said the settlement also will not affect a separate federal criminal investigation of Prudential being conducted by the U.S. attorney’s office in Manhattan.

As is common in SEC settlements, Prudential will not be required to admit any wrongdoing.

Prudential spokesman William J. Ahearn declined to comment, except to say, “We believe we’re close to a settlement with the state securities commissioners, the SEC and the NASD.” Ahearn said he was unaware of and had no comment on investigations of individual Prudential executives.

The unlimited nature of the restitution fund means that Prudential’s potential exposure is much higher. But it remains unclear how likely it is that the firm will have to lay out more than the initial payment.

No punitive damages will be paid, but investors could receive back their out-of-pocket losses plus interest, depending on the facts of their individual claims, sources said.

Minor details remain to be worked out, but the payments would settle disputes between Prudential and the Securities and Exchange Commission, state securities regulators and the National Assn. of Securities Dealers. It was not clear Thursday whether all 50 states would go along with the settlement, although many have reacted positively to it.

SEC enforcement officials declined to answer any questions about the settlement or investigation.

The fines and initial payments to the restitution fund total $365 million, making the package the third-largest securities fraud settlement in U.S. history. Drexel Burnham Lambert paid $650 million in 1989 to settle charges related to its junk bond operation, and former Drexel executive Michael Milken paid $600 million in 1990.

The impact on Prudential will be eased by the fact that whatever it pays out in restitution will be tax-deductible, the sources said.

Nearly all the partnership programs involved in the investigations and settlement were unsuccessful, with investors’ losses estimated in the billions of dollars.

But the partnerships were extremely profitable for Prudential, bringing in well over $1 billion in commission revenue and management fees.

In numerous civil lawsuits, Prudential has been accused of misleading small investors by claiming that partnership units were as safe as insured bank certificates of deposit and of engaging in financial manipulations to hide losses from investors.

In thousands of pending arbitration cases and lawsuits, Prudential continues to aggressively deny any wrongdoing. However, spokesman Ahearn has said publicly that the firm “made some mistakes in the past” and wants to make amends.

Of the initial $320 million Prudential will pay into the restitution fund, $120 million will settle a class-action lawsuit filed on behalf of investors in Prudential’s single largest partnership program, a group of oil and gas partnerships known as the Energy Income Funds.

Few details of how the restitution fund will work have been disclosed, and some are still being negotiated. Some investors and their lawyers remained skeptical.

Dave Van Hoomissen of Escondido, Calif., who heads a group of investors battling Prudential over big losses from investments in research and development partnerships, said $320 million “wouldn’t make anyone whole by any means.”