NEW YORK — The Securities and Exchange Commission and state regulators today are expected to announce that Prudential Securities will pay an initial $370 million to settle charges that it defrauded hundreds of thousands of small investors in limited partnerships.
The sum includes $330 million for a restitution fund for customers plus about $40 million in fines payable to the SEC, the states and the National Assn. of Securities Dealers, according to sources with copies of the settlement documents.
As expected, Prudential--the nation's fourth-largest brokerage--could be required to pay even more restitution later if enough customer claims are ruled valid.
By late Wednesday, at least 49 states had agreed to participate in the settlement, reducing the likelihood that the firm could face a crippling loss of state licenses or protracted legal action by individual states.
The final accord, covering some 700 partnerships sold by Prudential in the 1980s, is expected to be signed today by a federal judge in Washington.
Negotiations have been underway for months to resolve federal and state investigations of Prudential's sales of $7.7 billion in limited partnership interests to some 600,000 customers. The great majority of partnerships produced losses, with the total estimated at more than $3 billion. For its part, Prudential collected more than $1 billion in commission revenue and management fees.
Among other alleged wrongdoing, Prudential has been under investigation for allegedly misrepresenting to small investors that the partnership units were safe alternatives to federally insured bank deposits. The firm has denied wrongdoing but acknowledged mistakes in the operation of some of its partnership programs.
Prudential spokesman William J. Ahearn said the firm would have no comment until after the regulators' announcement. SEC officials also declined to comment.
It would be the third-largest SEC settlement in a securities fraud case, behind only those with Drexel Burnham Lambert and its junk bond king, Michael Milken. Unlike those settlements, most of the money paid by Prudential will go to customers.
"Prudential will still get away with quite a lot of money" in profits from the partnership sales, said a securities commissioner from a Midwestern state, who asked not to be identified. Still, he added, "it's a good settlement because it appears to be the most we can get."
The settlement is in line with earlier news accounts. But details obtained Wednesday indicate that customers will have to leap a number of hurdles to get money back. It also became clear that many will not get back all of their out-of-pocket losses.
Under the settlement, customers first will file claims with Prudential. They will have to provide information showing they were misled or were legally unsuitable for the investments sold to them and provide details of how they bought their partnership units.
Prudential will then make an offer or reject the claim.
If customers do not accept Prudential's initial decision, they can opt to participate in an arbitration procedure. Irving M. Pollack, 73, a former SEC commissioner who was once the agency's enforcement chief, has been named a special, independent claims administrator to ensure that the process works fairly.
The settlement will not affect pending criminal investigations of Prudential by U.S. attorneys' offices in New York and Texas, sources said.
John Perkins, Missouri's securities commissioner, said his state initially was going to reject the settlement but decided to go along after getting added assurances that it could participate in the process of notifying customers how to file claims.
"I still have reservations about it, because from my standpoint Prudential violated state law," Perkins said. "And when you violate state law, everyone is entitled to get all of their money back plus 8% interest."
Each state that goes along with the accord will receive $500,000 in fines from Prudential. The SEC is to receive $10 million in fines, with an additional $5 million to be paid to the NASD.
It was expected that the $120 million Prudential has agreed to pay to settle a class-action lawsuit over its Energy Income partnerships would count toward its restitution obligations.