Prudential Settles for $600 Million

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The New York Sun

Prudential Financial Inc., the second-largest American life insurer, agreed to pay $600 million to settle investigations of improper mutual fund trading, said two people with knowledge of the accord. It will be the second-biggest penalty in the three-year-old industry probe.

The U.S. Justice Department will enter into a so-called deferred prosecution agreement with Newark, New Jersey-based Prudential later today, said the people, who declined to be identified before an official announcement is made. Under deferred prosecution, a company agrees to change its business practices and prosecutors don’t take the case to trial.

“The government has undoubtedly come upon evidence it perceives as damning and thinks it can get a conviction if it goes to trial, otherwise it wouldn’t be putting a deferred prosecution alternative on the table,” said Christopher Bebel, a former lawyer at the U.S. Securities and Exchange Commission who is now in private practice in Houston.


Since New York Attorney General Eliot Spitzer accused four firms in September 2003 of allowing improper trading, U.S. regulators have reached civil settlements with more than two dozen mutual fund and brokerage companies, and over 30 former executives. Total penalties will now exceed $5 billion. Prudential will be the first company in the industrywide investigation to settle under threat of federal criminal action.

Justice Department spokeswoman Jackie Lesch declined to comment. Prudential spokesman Bob DeFillippo said the company wouldn’t comment.

Regulators have alleged Prudential allowed Boston-based brokers to make trades that benefited hedge fund clients at the expense of long-term mutual fund investors.Two former brokers at Prudential Securities, which was sold to Wachovia Corp. in 2003, pleaded guilty to federal fraud charges last year after prosecutors said they used fake identities to skirt controls and make fraudulent trades on behalf of favored clients.


Prudential has set aside at least $900 million for settlement and litigation costs since 2003. The Wall Street Journal reported the $600 million figure in a story on its Web site August 25.

The biggest market timing settlements have been Bank of America Corp.’s $675 million accord in 2004 and a $600 million agreement by AllianceBernstein LP in 2003. Both companies settled with the SEC and Mr. Spitzer. Bank of America’s settlement included payments by FleetBoston Financial Corp., which it bought in April 2004.

Regulators have said Prudential Securities was complicit in two types of abuses that take advantage of the fact that mutual funds are valued once a day while the securities they own trade more frequently.


So-called market timing is excessive in-and-out trading that can raise a fund’s transaction costs and reduce gains for long-term holders. Late trading is buying or selling fund shares after the close of trading at 4 p.m. Eastern time. The trader is able to profit from events that occur after the close.

Five former brokers were sued by the SEC in 2003 and two of them, Martin Druffner and Skifter Ajro, pleaded guilty to federal criminal charges of wire and securities fraud. They haven’t been sentenced.

Prudential’s sale of the brokerage to Wachovia was a cashless transaction. Wachovia combined Prudential Securities with its own brokerage, giving Prudential Financial a 38% stake in the new entity.

The New York Sun

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