Let the finger pointing begin.

As the mutual fund scandal kicks into high gear, brokers are starting to unveil their plans for fighting regulators' charges of fraud against them. And if the legal documents filed by some former Pru employees are any indication, the whole scandal is about to get more confusing to the average observer.

Heavily supported by documents, including internal Prudential memos and copies of order sheets, the SEC, in November, charged several former Boston-based Pru brokers with market timing, with changing rep numbers to avoid detection and with ignoring entreaties from mutual fund companies to stop.

Surprisingly, the brokers admit openly to many of these activities. By way of defense, the brokers are saying the SEC is in too nebulous an area to adequately charge them with anything. Market timing is not illegal, after all. But, then some are taking the additional step of deflecting blame by saying the firms involved — including Prudential — knew about the activities cited by regulators.

In short, the reasoning goes, the reps weren't deceiving anybody — just aggravating people.

“Those are defenses, but they're not necessarily good defenses,” says Donald Langevoort, professor of securities law at Georgetown University. “Especially in the brokerage area, firms create expectations of trust and confidence through their advertising. So, unethical conduct hidden from the view from investors can easily be characterized as fraudulent.”

Two Pru reps, Martin Druffner, who was one of Prudential's top producers, and Skifter Ajro, filed a formal response to the SEC charges through their attorney, Daniel Rabinovitz of Dwyer & Collora in Boston.

The pair admits to market timing, to receiving memos from mutual funds asking them to stop and to opening multiple accounts in order to disguise the source of market timing transactions. According to the SEC complaint, Prudential's mutual fund exchange desk entered more than 1,200 mutual fund exchanges totaling more than $162 million in a single three-month period.

However, they claim that because the mutual fund companies knew what was going on, the acts do not meet the Securities Act of 1933's definition of a “deception.”

“How can it be deceptive if everybody knew about it?” Rabinovitz said to the Associated Press. (He did not return a call from RR seeking comment.) Druffner and Ajro deny the allegation that they were circumventing mutual fund policies.

But their actions weren't making the mutual fund companies very happy. One letter from an AIM Funds representative to a fellow exec asks, “What is it going to take to insure that Pru branch and home office mgt. take these timing issues seriously?”

If there's one thing the brokers, the companies and the SEC agree on, it's that putting a stop to market timing was not much of a priority for Pru executives. Druffner's attorneys and the SEC both charge that Prudential lacked compliance procedures to halt market timing (though it was prohibited for internal Prudential wrap products), and that they told Druffner things were “business as usual” even when such a policy was codified.

One fund manager says it's obvious that Pru implicitly approved of market timing, noting that the sheer number of transactions all but removes the firm's plausible deniability. “New York was executing those trades,” he noted.

Pru admits there was no official policy on market timing from 1999 to 2002 for all but internal wrap programs, for which it was restricted. Druffner also claims he received verbal approval for market timing, and was not told to desist, even when the Prudential-Wachovia merger approached.

But Druffner is not alone in fighting the market timing charges, and his is not the only approach to defending against them. The most curious alternative is probably John Peffer's, another member of Druffner's group, whose attorney, Michael Collora (same law firm as Rabinovitz) simply says that he disagrees with the definition of market timing, and therefore denies any wrongdoing. Meanwhile, a former Boston branch manager, Bobby Shannon, is asking for a dismissal of all charges.

If there's one thing all these defenses highlight, it's that the charges have left some wiggle room for the defendants, because many of the actions listed are not technically illegal.

It's not often that in a legal case the prosecutor admits that the underlying activities used — in this case market timing — weren't illegal to begin with. And it's not often that the defendant admits to engaging in much of the activity that the prosecutor finds objectionable.

Still, to some observers, that's precisely the point. In bringing the charges, the SEC and other regulators are signaling that Wall Street has crossed over some ethical divide and needs to be reined in. And, Langevoort adds, when the regulators put their minds to it, it's not all that difficult to build a solid case — even when dealing with issues as complex as these.

“It's murky, and not terribly hard for regulators to say what you call ethical, we call deception,” he says.