Prudential Admits Improper Trading
The brokerage unit of Prudential Financial Inc. on Monday admitted criminal wrongdoing and agreed to pay $600 million to settle government investigations of allegations that its brokers engaged in improper mutual fund trading.
Brokers in Prudential’s securities unit went to great lengths to facilitate so-called market timing for hedge funds, including disguising their identities after mutual funds detected the trading and tried to stop it, according to the Securities and Exchange Commission, one of several state and federal agencies that reached a settlement with the company.
Senior Prudential executives were aware of the trading but let it continue, even tracking the profits being generated, the SEC said.
“The deceptive trading practices at Prudential were compromising the integrity of many mutual funds,” said Deputy Atty. Gen. Paul McNulty. “Investors were dealt a bad hand by corporate con men who stacked the deck against them.”
Prudential is one of the last financial services companies to settle in the 3-year-old trading scandal, which came to light after New York Atty. Gen. Eliot Spitzer filed the first set of charges based on a tip from an industry source.
Nineteen companies -- primarily mutual funds -- have agreed to settlements totaling nearly $4 billion.
The Justice Department entered a five-year deferred-prosecution agreement with Prudential, meaning that the company will not be charged if it complies with the pact between now and 2011.
The department chose not to indict Prudential because of the potential “undue harm to innocent” employees, according to the agreement.
Accounting giant Arthur Andersen went under because of its indictment and 2002 conviction on charges of destroying documents in the government’s investigation of Enron Corp. The U.S. Supreme Court later overturned the ruling, but by then the firm had collapsed.
Market timing is the rapid purchase and sale of mutual fund shares in the hope of profiting from short-term market swings.
The practice is not illegal, but many fund companies bar market timing because such trading can hurt long-term shareholders.
“Hedge funds, brokers and mutual fund salespeople were making deals at the expense of the long-term investor,” said Russ Kinnel, research director at fund tracker Morningstar Inc. “The breach of trust was very severe.”
The Prudential payment is second in size to the $675 million that Bank of America Corp. agreed to in March 2004, and matches the $600-million penalty assessed Alliance Capital in December 2003.
“We take these matters very seriously and deeply regret the conduct of some former employees that led to these problems,” Prudential Chief Executive Arthur F. Ryan said. “This settlement represents our desire to do the right thing and to put this matter behind us.”
Of the $600 million, $270 million will go into an SEC-administered fund to repay aggrieved investors.
Whether the money goes to the funds themselves or to shareholders who invested in the funds at the time of the infractions will be determined by an independent consultant.
Of the rest, $325 million will be paid as a criminal penalty to the Justice Department and $5 million as a civil penalty to the Massachusetts securities-regulatory unit.
According to regulators, Prudential brokers in Boston and New York engaged in scores of trades from late 1999 to mid-2003 that generated more than $162 million in profit for their hedge fund clients. The brokers took in almost $50 million in commissions for Prudential.
The mutual funds tried to block the trading. But the brokers took countermeasures, including using dozens of trading identification numbers, making up fictitious customer names and breaking large trades into smaller chunks to evade monitors.
The mutual funds wrote more than 1,000 letters and e-mails to Prudential asking that the activity be stopped, according to the SEC.
But “the firm elected to continue the business of market timing,” the SEC said. “Rather than discipline or sanction any of the representatives or even curtail their ability to open additional accounts for their market-timing customers, [Prudential] failed to prevent their conduct from continuing and actually began to track the representatives’ gross revenues.”
The SEC also brought civil charges against four former Prudential employees.
Shares of Prudential rose 83 cents Monday to $73.72.
*
(BEGIN TEXT OF INFOBOX)
Fund settlements
Settlements in the mutual fund trading scandal:
(In millions)
*--* Institution, date Amount Bank of America/Fleet, 3/04 $675 Prudential, 8/06 600 Alliance Capital, 12/03 600 Invesco/AIM Advisors, 9/04 450 Mass. Financial, 2/04 350 Millennium, 12/05 180 Janus Capital, 4/04 175 Strong Capital, 5/04 75 Pilgrim Baxter (founders), 11/04 160 CIBC, 7/05 125 Pilgrim Baxter, 6/04 100 Federated Invstmts., 11/05 100 Banc One, 6/04 90 Waddell & Reed, 7/06 52 Canary Capital, 9/03 50 Fred Alger Mgmt., 6/06 40 Veras Investment, 12/05 38 RS Investments, 10/04 30 Fremont Investment, 1/05 4 Total $3,994
*--*
Source: Reuters
