Prudential Enters into $600 Million Settlement for Market Timing - September, 2006
Prudential Equity Group LLC (PEG), a broker-dealer and investment adviser, has entered into a deferred prosecution agreement with the Department of Justice--admitting to criminal wrongdoing in connection with market-timing practices dating back to 1999 and agreeing to pay a record $600 million in a global settlement with seven regulators, Deputy Attorney General Paul J. McNulty and other regulators announced Aug. 28.
The $600 million penalty is the largest settlement to date paid by a single company for alleged market timing. A 2004 settlement by Bank of America Corp. for $675 million to resolve market timing and late trading charges also covered allegations against subsidiaries of FleetBoston Financial Corp., with which the company had just merged (36 SRLR 513, 3/22/04).
At a briefing at the Justice Department in Washington, McNulty and Linda Thomsen, director of the Securities and Exchange Commission's Division of Enforcement, said that PEG, formerly known as Prudential Securities Inc. (PSI), settled SEC administrative charges alleging that former PSI brokers defrauded mutual funds by concealing their identities, and those of their hedge fund clients, to evade mutual fund prospectus limitations on market timing (In re Prudential Equity Group LLC, f/k/a Prudential Securities Inc., SEC, Admin. Proc. File No. 3-12400, 8/28/06).
Thomsen reported that the SEC has brought more than 90 civil cases involving allegations of market timing or late trading since the mutual fund trading scandal broke in September 2003, assessing payments of more than $3 billion to be returned to investors.Criminal Penalty, Disgorgement
Under the global settlement, PEG, a subsidiary of Prudential Financial Inc., agreed to pay $325 million as a criminal penalty to the Department of Justice, $270 million in disgorgement to a distribution fund for those harmed by fraud, and $5 million as a civil penalty to the Massachusetts Securities Division. Of the criminal penalty, $300 million will be paid directly into the U.S. Treasury, and $25 million will go to the U.S Postal Inspection Service's Consumer Fraud Fund. USPIS investigated this case for two years, according to its Inspector in Charge of the Boston Division, Peter Zegarac.
In reaching the settlement, PEG neither admitted nor denied the SEC's allegations. In addition to disgorgement, it agreed to be censured and to hire an independent consultant for the distribution of $270 million.
To date, three individuals associated with the alleged fraudulent trading at PEG's Boston office--Martin Druffner, Skifter Ajro, and Robert Shannon--have pleaded guilty to wire and securities fraud charges, McNulty related (37 SRLR 1481, 9/5/05 ; 37 SRLR 1334, 8/8/05 ).
According to McNulty, through the alleged conduct, PSI brokers generated commissions amounting to some $50 million, and their hedge fund clients profited by at least $100 million from the market timing. The alleged market timing practices took place from 1999 through at least June 2003, regulators said.
Regulators said that there are about two dozen individuals believed to have been involved in the alleged illicit conduct at PSI, though fewer than a dozen have been charged. McNulty and Thomsen said the criminal and SEC investigations are continuing.
Market timing is the rapid in-and-out trading of mutual fund shares to take advantage of market pricing inefficiencies, in violation of the fund prospectus' limitation on the practice, to the detriment of other shareholders.
Read more about Prudential's market timing activities.