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Seven Ex-Prudential Employees Charged

U.S. and Massachusetts regulators allege that brokers and managers in Boston improperly traded mutual funds.

November 05, 2003|From Reuters

Federal and Massachusetts regulators Tuesday filed charges against seven former Prudential Securities employees, saying they defrauded mutual funds and made millions of dollars in improper trades, and did so with the support of their superiors.

In a case that has been expected for several weeks, regulators said that from at least as far back as 2001 until September the former Prudential employees engaged in market-timing trades of mutual funds, at times under false names.

Market timing consists of rapidly trading in and out of funds to exploit pricing inefficiencies. Although not illegal, the practice hurts long-term investors because the rapid dashing in and out of portfolios can raise trading costs and dilute profits.

Most mutual fund firms have rules against market timing.

A complaint by the Securities and Exchange Commission alleged that the Prudential brokers "misrepresented their own identities or the identities of their brokerage customers in order to engage in thousands of market-timing trades."

The civil charges are significant because brokers are often the link between everyday investors and mutual fund firms, which manage investments for about 95 million Americans.

Massachusetts regulators said in their complaint that Prudential ignored 25,000 to 30,000 letters sent in the last year by at least 68 mutual fund companies warning the firm that its Boston office was engaged in market timing.

"This conduct, if true, is dramatically worse than the earlier conduct seen at Putnam," said David Marder, a former SEC enforcement lawyer. Putnam Investments, the fifth-largest U.S. fund company, last week became the first fund company to be charged in the probe.

"This is on a much larger scale and this is not the conduct of a few rogue brokers but Prudential itself, who not only failed to detect but actively encouraged it," Marder said.

Lawyers for the former Prudential employees said their clients had done nothing illegal.

The SEC and Massachusetts Secretary of the Commonwealth William Galvin said executives in Prudential's Boston office not only left unpunished those who allegedly conducted improper trading, but also supported it.

"Company policies against market timing and short-term trading were clear," Galvin said in a statement. "Disciplinary action was nonexistent."

Galvin's complaint also said the former Prudential brokers helped hedge funds Chronos Asset Management Inc. and Head Start engage in market timing by opening accounts for them and letting them buy and sell mutual fund shares.

Neither hedge fund could be reached for comment.

In their complaint, Massachusetts regulators named former brokers Martin Druffner, Justin Ficken, Skifter Ajro and former managers Michael Vanin and Robert Shannon. The SEC complaint did not include Vanin, but charged brokers John Peffer and Marc Bilotti.

Regulators may also consider filing charges against Prudential Securities itself, according to a source close to the investigation. The SEC and a spokesman for Galvin declined to comment.

Regulators said Shannon, a former manager at Prudential's Boston branch, "substantially assisted [the brokers] in evading the restrictions on their trading." Both brokers and managers pocketed handsome commissions in the process.

For instance, Druffner, a former broker, made $5 million in commissions mainly from market timing in 2002 alone, according to the SEC.

A lawyer representing Shannon said the former Boston branch manager had implemented company policy and had not broken any industry rules.

Prudential would not comment on its policies, but a spokesman said the company had cooperated and would continue to cooperate with the SEC and Massachusetts regulators.

Prudential Securities became jointly owned by Wachovia Corp. and Prudential Financial Inc. in July after being wholly owned by Prudential Financial.

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