WASHINGTON – Prudential Financial Inc. (PRU) and a subsidiary have agreed to pay $600 million in penalties to resolve government allegations of deceptive market timing in the trading of mutual funds, the Justice Department announced Monday.
The subsidiary, Prudential Equity Group., LLC, admitted to criminal wrong doing in the scheme dating back to 1999, the department said.
The parent company, Prudential Financial, entered into a separate compliance agreement with the Justice Department to cooperate in the ongoing investigation of market timing and to maintain policies and procedures to insure that affiliated entities follow the law.
The settlement is one of the largest resulting from a broad probe of market timing that has rocked the fund industry for the past three years. In 2004, Bank of America Corp. (BAC) agreed to a $675 million deal.
Charges were outlined in a criminal information prosecutors are filing in federal court against Prudential Financial and the subsidiary. Justice officials have agreed to defer prosecution so long as the companies abide by terms of the agreement.
A criminal information is a criminal charge filed in court by prosecutors, usually when the defendant has agreed to waive grand jury indictment.
The agreement was announced Monday afternoon at a news conference by Deputy Attorney General Paul J. McNulty, Securities and Exchange Commission enforcement director Linda Thomsen, U.S. Attorney Michael J. Sullivan of Boston, and Peter Zegarac, chief of the Boston district of the U.S. Postal Inspection Service.
The government accused New York-based Prudential Equity Group of engaging in deceptive late market timing in the trading of mutual fund shares. The $600 million in fines, restitution and penalties would resolve all civil and criminal allegations.
The $600 million includes $270 million to be paid into a fund administered by the SEC for investors harmed by the fraud, $325 million to be paid to the Justice Department and a $5 million civil penalty to be paid to the Massachusetts Securities Division, which regulates securities trading.
In addition to those penalties, Prudential Equity Group was censured by New York Stock Exchange regulators.
Agreements were reached with both Prudential Equity Group and its parent company, Prudential Financial Inc. of Newark, N.J.
"We take these matters very seriously and deeply regret the conduct of some former employees that led to these problems, " Prudential Chairman and CEO Arthur F. Ryan said in a statement. "We have strengthened our compliance programs. Prudential cooperated with the authorities throughout the process. This settlement represents our desire to do the right thing."
The discovery of widespread market timing triggered a scandal as state and federal regulators filed a wave of lawsuits in late 2003. Before Prudential's settlement, 15 firms had reached settlements totaling more than $3.5 billion.
The Prudential settlement stems from civil charges filed about three years ago. The lawsuit alleged that five former Prudential Securities brokers and their branch manager in Boston helped sophisticated investors make more than $1.3 billion of market-timing trades in mutual-fund shares. The suit alleged that this rapid trading raised expenses and lowered returns to shareholders of more than 50 fund families.
Market timing is the use of quick trades to move money in and out of funds quickly, often taking advantage of different closing times for markets around the world. Most funds have policies forbidding it because heavy fund-share trading typically dilutes the profits of longer-term shareholders in the fund.
Authorities have alleged that Prudential's Boston-based brokers created fake accounts and changed account numbers to help mask the rapid trading by lucrative hedge-fund clients after certain mutual funds had blocked them or their customers from such trades.
Two of the Boston office's former brokers, Martin Druffner and Skifter Ajro, pleaded guilty last year to wire and securities fraud counts. Their former branch office manager, Robert E. Shannon, pleaded guilty to aiding and abetting securities fraud.
Shannon, a 54-year-old former Brookline, Mass., resident now living in Maryland, resigned in 2003. Prudential's Boston office is now jointly owned by Wachovia Securities LLC and Prudential Financial Inc.
Prosecutors said Druffner began making fraudulent trades in 1999, before other Boston-based Prudential brokers working with him allegedly joined the scheme on behalf of seven hedge-fund clients. Prosecutors said trading continued through October 2003, when the group left the company just as disclosures about market timing and other trading abuses were ensnaring much of the mutual fund industry.
A civil complaint by the Securities and Exchange Commission alleges participants received nearly $5 million in gross commissions in 2002 alone.