Prudential Securities Inc. said it incurred $1.4 billion of costs from its limited partnership scandal last year, confirming that its fraudulent securities sales became Wall Street's most expensive debacle.
Those costs drove the nation's fifth-largest securities firm into the red last year with a record $811-million loss. Its Prudential Insurance Co. of America unit earned $145 million in 1993, after charges of $430 million related to the scandal.
"The cost of the settlement shows that doing business in an improper manner is not cost-effective in the long run," said Joel Brenner, attorney for Storch & Brenner. Brenner represents the administrator for Prudential's settlement fund with investors.
Prudential Securities admitted criminal wrongdoing and agreed to be placed on three years' probation last October under a federal settlement. The company added $330 million to its restitution fund, doubling the size of the fund. A year earlier, the firm paid $371 million to settle Securities and Exchange Commission and state charges related to the scandal.
Investors bought $8 billion of Prudential limited partnerships in the 1980s and early '90s. Prudential relied on fraudulent sales tactics that misrepresented the risks, rewards and liquidity of the securities. The securities lost more than $1 billion.
All told, the scandal has cost Prudential almost $2 billion. "You are aware of (Prudential's) annus horribilus ," said David Havens, a Standard & Poor's Corp. analyst. The costs from the scandal contributed to the 11% decline in Prudential Insurance's capital last year.
Prudential Securities' costs from the scandal were greater than expected because investor claims for damages poured in during the two weeks prior to the Jan. 10 filing deadline, Brenner said. Investors filed as many as 4,500 claims a day just before the deadline, he said.
The firm offered more than $600 million to investors after reviewing the filings, Brenner said, adding that investors accepted more than $512 million.