NEWS ANALYSIS : Investor Lawyers Call Prudential Settlement a Pebble, Not a Rock
Hefty though it seems, the proposed $365-million-plus settlement of investigations into allegedly massive fraud by Prudential Securities is drawing howls of criticism from investor groups and customers’ lawyers, who contend that the Securities and Exchange Commission is letting Wall Street’s fourth-largest brokerage off easy.
If the settlement with the SEC, the National Assn. of Securities Dealers and state securities regulators becomes final, the critics say, it may well turn out to be a legal and financial coup for Prudential.
In one of the biggest investment debacles of the 1980s, the firm--formerly known as Prudential-Bache--took in $7.7 billion for its limited partnership programs, mainly from small investors. The programs earned big profits for the firm, but left customers with losses estimated by investor lawyers and state regulators at $3 billion or more.
Prudential will not comment on the tentative agreement, and regulators insist they have cut a good deal.
But the proposed settlement--under which Prudential would pay at least $320 million in restitution and $45 million in fines--would not begin to cover investors’ out-of-pocket losses, let alone lost interest. Investors’ advocates say it underscores the difficulties faced by regulators in bringing a major case against a powerful Wall Street firm with the most sophisticated legal talent and the will to fight.
“There is so much anger toward Prudential from many of our members,” said Diane Lichtenstein, director of consumer affairs for the American Assn. of Limited Partners. “They say that $365 million doesn’t sound like a whole lot when you add up the actual losses and the thousands of investors who were ripped off.”
Added Michael Cryden, a lawyer representing about 1,200 investors in suits against Prudential: “It appears that Prudential has done a masterful job of negotiating a settlement.”
That suggestion rankles regulators.
They declined on-the-record comment, because the settlement has not been finalized and the case is still under investigation.
In background discussions, however, regulators noted that the settlement will enable many people to get money back who otherwise might not. Much of the alleged wrongdoing occurred more than three years ago, they said, so action might be barred by legal statutes of limitations.
And, regulators add, the amount of restitution to be paid is open-ended. Prudential could be called on to contribute more if the $320 million--likened by one regulator to “a down payment”--doesn’t cover all valid claims.
Officials of Prudential--which has acknowledged “mistakes” but denied wrongdoing in its partnership sales--declined to comment, because no agreement has been signed. But people close to the firm’s side of the negotiations sharply contradict regulators’ claims. While Prudential technically is obliged to pay more if called upon, they say it is extremely unlikely that will happen.
The overlapping state and federal investigations centered on Prudential’s sales of limited partnership units in enterprises ranging from oil and gas ventures to the breeding of race horses. From 1983 through 1990, about 400,000 investors nationwide, including tens of thousands in California, poured money into dozens of Prudential-sponsored limited partnerships.
According to internal documents disclosed in pending lawsuits, the firm routinely misrepresented investments as being safe alternatives to bank certificates of deposit, suitable for retirees of relatively modest means. Allegedly, Prudential also misled customers about the value of their partnership units and continued to sell them aggressively even though internal documents showed they were performing poorly.
In recent months, additional details emerged. For instance, Prudential knowingly allowed a convicted (but pardoned) swindler to run one of its larger real estate partnerships. And executives in charge of the entire partnership program had a network of undisclosed personal business dealings with partnership managers they supervised.
Said Prudential spokesman William J. Ahearn: “The point is these things don’t happen now, and they shouldn’t have happened in the past. We’re committed to correcting any mistakes we made.”
As is standard under SEC settlements, Prudential will not formally admit or deny guilt. Critics note that this will be at least the sixth time in a decade that the firm will have settled SEC allegations that it defrauded retail investors.
Of the earlier cases, by far the biggest was the so-called Captain Crab case, settled in January, 1986. Prudential brokers, the SEC alleged, had improperly sold highly risky options contracts to customers, funneled money out of customers’ accounts and failed to disclose important facts about stock sales.
At the time, the SEC said the case showed a pervasive weakness by the firm in supervising its employees and ordered Prudential to hire an outside consultant to draw up a list of management reforms.
Lawyers note that much of the most severe alleged wrongdoing in Prudential’s limited partnership program occurred from 1986-88--immediately after Prudential undertook those reforms.
“How many times do you censure and warn a firm to get its act straight, and how many billions of dollars does the public have to lose before the regulators finally really do something?” Cryden asked.
Still, for Prudential Securities--which is enjoying a record year for profit--the pending settlement may well mean that a major threat to its business has been defused.
If most states agree to the settlement, as is expected, Prudential will have avoided the potential disaster of losing its state licenses to do business. And since most of what the firm will have to pay out will be restitution rather than fines, the bulk will be tax-deductible.
As state securities regulators--many of them hit hard by budget cutbacks--began to seriously consider the costs of bringing a case to court, many found the notion of settling increasingly attractive.
The SEC too had a strong incentive to settle because prosecuting a case involving as many as 90 separate partnerships programs could tie up much of the enforcement division’s limited staff.
Moreover, Prudential has been represented by powerful outside legal talent. For example, Gary Lynch--the former SEC enforcement chief who oversaw the commission’s filing of the Captain Crab case--has handled the negotiations on Prudential’s behalf. Lynch, now in private practice, is highly regarded at the SEC for his aggressive handling of its Dennis Levine, Ivan Boesky and Michael Milken investigations.
The SEC’s current enforcement chief, William R. McLucas, angrily rejected the notion that Lynch’s former position with the SEC could influence the talks. “I think it’s an outrageous suggestion. If anyone thinks they can buy favorable treatment or influence a prosecutorial recommendation of this division, then they don’t understand how the division operates.”
* MANAGER WINS JUDGMENT: A former Dean Witter Reynolds branch manager who tried to stop employees from forging customer signatures was awarded $1.5 million. D3.
Biggest SEC Penalties
The Securities and Exchange Commission is in the final stages of negotiating a $365-million agreement with Prudential Securities to settle allegations of fraud in the sale of limited partnerships during the 1980s. Such a settlement would be the third-largest in U.S. history. Firm/Individual: Drexel Burnham Lambert Amount (millions): $650 Year: 1989 Reason: Settle junk bond charges
*Firm/Individual: Michael Milken Amount (millions): $600 Year: 1990 Reason: Settle charges of securities law violations
*Firm/Individual: Prudential Securities* Amount (millions): $365 Year: 1993 Reason: Settle fraud allegations
*Firm/Individual: Salomon Bros. Amount (millions): $290 Year: 1992 Reason: Settle charges alleging illegal bidding in Treasury bill auctions and falsifying of customer orders
* Tentative
