Resolving allegations that Prudential Securities fleeced hundreds of thousands of customers, the Securities and Exchange Commission on Thursday settled a case charging the nation's fourth-largest brokerage with what SEC Chairman Arthur Levitt Jr. called "extremely serious misconduct."
The SEC charged that Prudential allowed rogue executives to cheat customers on a large scale and blithely ignored a 1986 SEC order to overhaul its internal enforcement of securities laws. During the 1980s, investors poured about $8 billion into 700 Prudential limited partnerships that regulators alleged were rife with misconduct.
Prudential, long in negotiations with regulators, agreed to settle by paying an open-ended sum in fines and restitution, beginning with a down payment of $371 million. The settlement also resolved investigations of the firm by the National Assn. of Securities Dealers and 49 states, including California, where 52,000 investors lost money in Prudential limited partnerships.
In Texas, the sole holdout, Prudential still risks losing its license to do business, according to Securities Commissioner Denise Voight Crawford.
The SEC also accused Prudential of serious misconduct in at least nine branch offices, including those in Laguna Hills and Newport Beach. According to the agency, those offices defrauded two elderly widows of much of their retirement savings by "churning" their accounts to generate steep commissions and putting their money into unsuitably risky investments.
Levitt made clear that the SEC is continuing its investigation and may bring further charges against high-level executives who worked at Prudential in the 1980s.
As is customary in SEC settlements, Prudential Securities neither admitted nor denied any of the charges. In a statement, Chief Executive Hardwick Simmons said, "We are pleased to bring this difficult situation to a close in a manner that fully recognizes the valid claims of investors who may have been sold limited partnerships in the 1980s that were improperly marketed or unsuitable for their investment needs."
But the settlement is unlikely to end the firm's legal problems.
Sources said criminal investigations by the U.S. attorney's offices in New York and Dallas and by the Dallas district attorney continue. In an interview, however, Simmons said the firm has not been served with any document stating that it is the target of a criminal investigation.
Meanwhile, several lawyers who represent large numbers of Prudential customers called the settlement inadequate and said they will probably continue to pursue independent lawsuits and arbitration.
Prudential, known in the 1980s as Prudential-Bache, is a subsidiary of Prudential Insurance Co. of America. Its partnership programs included investments in oil and gas, real estate, aircraft leasing, racehorse breeding and many other ventures.
The SEC charged that Prudential falsely "sold many limited partnerships as safe, high-yield investments," comparable in safety to bank certificates of deposit , while the firm knew they in fact were extremely risky.
The agency said Prudential used fraudulent sales materials in blatant conflict with information in its official prospectuses. The sales materials were "rife with misrepresentations and were often directed at investors who were wholly unsuitable for the products," said William McLucas, enforcement director for the SEC.
For example, the charges cited a partnership that invested in apartment complexes. The prospectus contained strong warning of risks. But broker sales materials stated the partnerships provided "growth, fast cash, safety and liquidity" and falsely stated that a letter of credit "guarantees 128% return to investors."
The investment produced losses.
The SEC said Prudential sold partnership units to many low-income, retired people who should have been directed to much more conservative investments. The commission also charged that Prudential deceived customers by giving them monthly statements that showed the value of investments unchanged from what they originally paid, when in fact the market value had plummeted.
At a news conference, Levitt emphasized that the $371-million settlement "is only a down payment" and that the firm could be required to pay substantially more.
The initial payment includes $41 million in fines to the SEC, the states and the National Assn. of Securities Dealers, plus a $330-million payment to a customer reimbursement fund. If valid customer claims exceed that sum, the settlement obliges Prudential to contribute enough to satisfy all claims. Investors who already have accepted class-action or arbitration settlements are ineligible to participate.
Some estimates of customers' losses exceed $3 billion. But Simmons said, "Our best estimate is that the $330 million we've come up with here is an adequate number."
In a separate set of civil charges, the SEC accused Prudential of ignoring a 1986 settlement with the commission in which the firm was accused of failing to supervise brokers who cheated customers.
In particular, the SEC singled out Prudential's Dallas office, where it said a broker was allowed to direct his own "department" free of any supervision with the alleged support of senior executives--all costing customers millions of dollars.
At $371 million, the settlement will be the third-largest ever of securities fraud charges, behind agreements with Drexel Burnham Lambert and junk bond king Michael Milken.
But Iowa Supt. of Securities Craig Goettsch, president of the North American Securities Administrators Assn., said at the SEC news conference that Prudential's wrongs "had much more client impact than what went on at Drexel and in some of the other notable scandals of the last decade."
Investors who may be eligible for reimbursements under the Prudential Securities settlement should receive notice from the firm spelling out their rights within two weeks. Those who have questions or do not receive a notice can call a toll-free hot line, (800) 220-9125. However, an operator who answered a reporter's call Thursday said the service is not prepared to answer detailed questions but will take requests for the printed notices.