California Threatens to Block Prudential From Doing Business in State : Securities: Commissioner seeks guarantees that the brokerage will not repeat its alleged misconduct. State is the last holdout in a nationwide fraud settlement.

California, the lone holdout against a nationwide fraud settlement with Prudential Securities, threatened Monday to temporarily suspend the brokerage from doing business in the state unless Prudential agrees to better treat investors in its troubled partnership programs.

State Corporations Commissioner Gary S. Mendoza declined to disclose the contents of a list of final demands he sent Prudential on Monday.

But Mendoza said he wants changes in the arbitration process that has been set up to compensate investors in the firm’s limited partnerships and stronger guarantees that Prudential will not repeat the kinds of misconduct of which it was accused.

If Prudential refuses, “we could take an appropriate enforcement action that would include an appropriate period of suspension,” Mendoza said.

Executive Vice President John P. Murray said Prudential “would love to have California sign” the settlement reached with the Securities and Exchange Commission and the other 49 states. But he said he could not comment on pending negotiations.

In a $371-million settlement with regulators in October, Prudential neither admitted nor denied defrauding hundreds of thousands of people who invested $8 billion in its limited partnerships in the 1980s, including more than 42,000 California investors.

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The brokerage said Monday that it will reject a separate proposal Mendoza made last week suggesting that Prudential be required to offer to buy back investors’ partnership units at the price at which they are valued by the company.

Mendoza made the recommendation to Irving Pollack, the independent administrator appointed by the SEC to supervise the settlement of investors’ claims.

The proposal was meant to make Prudential “put its money where its mouth is,” Mendoza said in an interview, by wiping out any temptation for the firm to falsely inflate the remaining value of the partnerships. Such inflation would lower the sums Prudential will pay investors to help make up for their losses.

“Not only will this keep (Prudential) honest, it will allow many investors who were unsuitable for this type of investment an opportunity to cash out of an investment they never should have been in,” Mendoza’s letter to Pollack says.

But Murray said Prudential will not buy back any partnership units. “We’re really not in the business of owning real estate or oil and gas,” he said.

The values assigned to the partnerships will be fair because they will be calculated by independent appraisers, Murray said. But he confirmed that the values will be based only on the underlying assets of the partnerships and will not take into account the management fees that investors are charged by Prudential each year.

Joel F. Brenner, an attorney working with Pollack, said the independent administrator does not have legal authority under the SEC settlement to order Prudential to buy back any partnership units.

He said Pollack will closely scrutinize the values assigned to the partnerships.

Separately, Prudential said Monday that it has named John F. Settel to the newly created position of corporate values officer.

Murray said Settel’s job will be to “help us make sure we always walk the ethical high road in our dealings with our clients and with each other.”

Settel worked for Prudential for 15 years before leaving in 1989 to teach business ethics and other business courses at Skidmore College in Saratoga Springs, N.Y.