Prudential Equity Group, a broker/dealer subsidiary of Prudential Financial, got slammed Monday with one of the biggest settlements seen in a market timing case: $600 million in fines, restitution and penalties. A number of regulators were involved in the case, including the Department of Justice, the Securities Exchange Commission, the New York Attorney General’s Office, the New York Stock Exchange, the New Jersey Bureau of Securities and the Massachusetts Securities Division.
Prudential Equity Group (formerly named Prudential Securities Inc. or PSI) admitted to criminal wrongdoing in connection with the market-timing practices of a number of its brokers, who conducted more than $116 billion in mutual fund transactions through 1,600 customer accounts, on the behalf of certain clients - typically sophisticated hedge funds -- between 1999 and June, 2003. The brokers earned more than $162 million in net profits for those clients, according to an NASD release, and nearly $50 million in gross commissions for Prudential. Many of the brokers involved were the firm’s top producers. The investigation is ongoing.
Brokers were able to subvert mutual funds' efforts at barring market-timing by placing the trades in multiple accounts, using multiple and sometimes fake client identities, and using dozens of different broker identification numbers. For example, one broker in Garden City, New York - who was the top producing broker at PSI between 2001 and 2003-- maintained as many as 49 different FA numbers and up to 400 accounts for just five clients.
Despite receiving thousands of letters and emails from more than 50 different mutual fund companies related the market timing activities of its brokers, PSI actually helped the brokers continue to market time by providing additional accounts for the clients engaged in timing, and limiting blocks on brokers’ FA numbers, according to regulatory releases. In January, 2003, PSI finally announced a market timing policy for third-party mutual funds, two years after it had done so for its own proprietary funds. But it didn’t enforce the new policy, and the market timing continued, according to NASD.
“The scale of the fraudulent market timing activity that was allowed to occur through this firm and that went unchecked by the firm’s supervisory systems is unprecedented,” said NASD Senior Executive Vice President Stephen Luparello. “The firm was aware that this activity was occurring and yet failed to take action to halt the conduct - except in its own proprietary mutual funds.” When asked what they thought of the settlement, a couple of brokers at Wachovia Securities, which purchased Prudential in 2003, said they had not yet heard or read about it.
In a related matter, the Securities Exchange Commission today filed an unsettled injunctive action in the United States District Court for the Southern District of New York against former PSI registered reps Frederick J. O’Meally, Jason N. Ginder, Michael L. Silver, and Brian P. Corbett for their market timing activities. In November, 2003, the Commission sued five former PSI reps and the former branch manager of the firm’s Boston, Mass. office for similar conduct. Martin Druffner, the alleged leader of one group, pleaded guilty in federal court last year to four counts of wire fraud and four counts of securities fraud. Another former broker, Skifter Ajro, also pleaded guilty in 2005 to two counts of wire and two counts of securities fraud. Neither of the two brokers has been sentenced. Branch manager Robert Shannon pleaded guilty in May to a criminal charge of aiding and abetting securities fraud and was sentenced to three years of probation and a $5,000 fine.
Only two other firms have settled for $600 million or more in market-timing cases: Bank of America Corp. agreed to pay up $675 million in 2004, though $300 million of that came from Fleet Boston, which it had acquired. AllianceBernstein LP settled for $600 million in 2003.