Prudential Enters into $600 Million Settlement for Market Timing Practices (Part 2)

Seven Regulators, SEC Action

The regulators that participated in the global settlement included--in addition to the U.S. Attorney's Office for the District of Massachusetts, the SEC, and the Massachusetts Securities Division--NYSE Regulation Inc., NASD, the New Jersey Bureau of Securities, and the New York Attorney General's Office.

In a related matter, the SEC filed a civil injunctive action in the U.S. District Court for the Southern District of New York against former PSI brokers Frederick J. O'Meally, Jason N. Ginder, Michael L. Silver, and Brian P. Corbett, Thomsen said (SEC v. O'Meally, S.D.N.Y., Civil Action No. 06 CV 6483, 8/28/06). Previously, the SEC sued five former PSI brokers and the former branch manager of PSI's Boston, Mass., branch office for similar conduct, Thomsen noted (35 SRLR 1882, 11/10/03).

C. Evan Stewart, of Zuckerman Spaeder LLP in New York, counsel to Ginder, told BNA that his client "intends to vigorously defend himself." Stewart said that "the alleged conduct was not only encouraged, but applauded" by the company, and that "the notion that Mr. Ginder had the requisite scienter to commit securities fraud is preposterous."

Counsel to O'Meally, Peter E. Fleming, of Curtis, Mallet-Provost, Colt & Mosle LLP in New York, told BNA that the SEC charges against O'Meally "came right out of the blue, with no notice or opportunity to submit a Wells statement." Fleming added, "It angers me." He said that his client "disputes the charges."

Counsel to Silver and Corbett could not be reached immediately.

According to the statement of facts accompanying the deferred prosecution agreement, a number of PSI brokers used deceptive practices to place thousands of prohibited market timing trades on behalf of the brokers' clients, which were typically hedge funds, McNulty said.

Allegedly, the brokers manipulated trade information sent over the automated mutual fund trading system PSI used to communicate trades to mutual funds. Through the automated system, brokers were able to defeat efforts by the mutual funds to block their abusive market timing trading, by placing their trades in multiple accounts, often with multiple identities, to make it appear that the trades were coming from many different, unrelated brokers, McNulty recounted.

Mutual Funds Complained

Thomsen said that mutual fund companies whose funds were being timed sent more than 1,000 letters to PSI calling for a halt to the brokers' conduct. "The company failed to take action to stop the fraud," she said. Similarly, according to the Justice Department statement, PSI ignored repeated letters and e-mails from mutual fund companies imposing blocks on further market timing activity by brokers. In fact, the statement says that PSI misled some fund companies by representing to them that PSI could and would stop brokers from trading in their funds, and then failing to do so. According to a NYSE Regulation press release, PSI "finally issued a market timing policy in January 2003, but the firm did not fully enforce procedures in that policy to end the scheming."

McNulty said that factors that contributed to the U.S. Attorney's decision to defer prosecution included PEG's cooperation and the restructuring of the company's leadersip since the time of the alleged practices.

In the deferred prosecution agreement, PEG agreed not only to the criminal penalty, but also to abide by a variety of terms and conditions for five years. For example, PEG agreed to cooperate with the Justice Department in its ongoing investigation into abusive mutual fund trading. The company's counsel will also periodically report to PEG's board of directors and the U.S. Attorney's Office.

The deferred prosecution agreement also includes PEG's waiver of the attorney-client privilege with respect to documents and information of PEG "that preceded the date of the discontinuance of the practices" at issue, not information after that date, McNulty explained. "There's every reason for [PEG] to be cooperative. ... Providing information that's relevant is expected," he added.

Contact Us
Contact Us: (800) 259-9010