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Post date: August 28 2006

Prudential Settles Market Timing Investigations

Attorney General Spitzer today announced an agreement to resolve an investigation of market timing by a leading financial services firm.

Under the agreement, the Prudential Equity Group will pay $270 million in restitution to injured investors. Under a separate agreement with the U.S. Department of Justice, Prudential will pay a penalty of $330 million. The agreements also require the company to undertake a series of reforms.

"We are pleased that Prudential has joined the long list of institutions that have agreed to compensate customers harmed by market timing activity and implement sweeping reforms," Spitzer said.

The investigation of Prudential began with a subpoena from the New York Attorney General’s Office in August 2003.

The investigation – conducted in cooperation with the Securities and Exchange Commission, New York Stock Exchange, National Association of Securities Dealers and the states of Massachusetts and New Jersey – revealed that the company’s brokers defrauded at least 50 mutual funds and their investors between September 1999 and June 2003.

Specifically, the brokers provided hedge fund operators and other favored investors with phony customer account numbers that were used to conduct repeated in and out trading of various funds. The scheme helped the favored investors evade the scrutiny of the "timing police" at the mutual fund companies.

Senior managers at Prudential were aware of the fraud. In April 2002, the manager of Prudential’s Mutual Fund Operations Division shared with other senior Prudential managers the following e-mail from another mutual fund family, which complained about Prudential’s brokers:

"What we have seen scares us. It appears certain representatives are changing account registrations, tax id numbers, and branch and rep [ID] numbers in an effort to time the [mutual fund family’s] funds. All of these accounts have been stopped, but each day "new" ones pop up."

In February 2003 the president of Prudential’s Private Client Group received a copy of an e-mail from the manager of Prudential’s branch office in Garden City expressing concern about the tactics used by Prudential’s top-producing broker to enable a customer to continue market timing at another mutual fund company:

"Fund companies have been misled as to the identity of the [brokers] of record... Recently, [a mutual fund company] was provided with information which was at best misleading to effect the removal [of] a block [from further market timing]."

Between 1999 and 2003, Prudential received more than a thousand letters and e-mails from mutual funds complaining of market timing by Prudential brokers. However, the company did not act to halt the activity, which harmed small investors who typically buy and hold their mutual fund shares.

The Prudential agreement is the 20th settlement since the Attorney General began a probe of improper mutual fund trading activity in July 2003. To date, these settlements have resulted in more than $3.7 billion in restitution for investors.

The Prudential investigation and settlement was handled by Assistant Attorney General Verle Johnson of the Investment Protection Bureau, with assistance provided by Economist Hampton Finer of the Attorney General’s Public Advocacy Division, under the supervision of Enforcement Section Chief Maria Filipakis and Bureau Chief David D. Brown IV of the Investment Protection Bureau.


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