The investigation into mutual fund trading abuses is widening, with the release of a complaint filed by the Massachusetts Securities Division against brokers who formerly worked in Prudential Securities’ hub office in Boston.
The brokers—Martin Druffner, Justin Ficken, and Skifter Ajro—are charged with fraud in connection with a market-timing scheme. Market timing—the shifting of money in and out of investments (from an equity fund to a money market fund, for instance) in an effort to take advantage of market fluctuations—is discouraged by many fund companies, but is not in itself illegal.
What would be illegal is if the brokers, as alleged, misrepresented themselves in an effort to hide their market-timing activities from the fund companies. The complaint includes damning e-mails from fund executives expressing dismay at the brokers’ use of several different rep numbers in order to avoid detection.
For example, one letter, from Hartford Mutual Funds to a Pru exec, asks Pru to restrict reps from trading in those funds. “They have continued to invest in the funds even after having their privileges revoked,” the letter said. “They are apparently accomplishing this by using different representative numbers, names, branches and smaller investment amounts.”
A lawyer for the brokers denies the charges, saying the complaint is riddle with inaccuracies, including assertions that his clients used upwards of 60 rep numbers. “That’s completely preposterous—they may have used 10,” says the lawyer, Daniel M. Rabinovitz of Dwyer & Collora of Boston. He adds that a certain amount of number-changing is procedurally acceptable for brokers.
“Everyone involved—Wachovia, Prudential, the mutual fund companies—knew of the timing activity of my clients,” Rabinovitz says. “There was no deception.”
The complaint also indicts two former branch managers of the Boston office, Robert Shannon and Michael Vanin. They are charged with failure to supervise.
The complaint says Pru received about 25,000 warnings about the market-timing abuses, but that the company declined to take action against the involved brokers. Rabinovitz says the brokers should not be held responsible for an activity that their company condoned.
“When Wachovia [which acquired Prudential over the summer] was doing its due diligence, do you think they didn’t notice the production level at the Druffner group? Of course they did, and they okayed it,” he says. “They knew exactly how they were operating, and they had no complaints.”
Wachovia executives declined to comment.