Prudential Financial, the life insurance company, agreed yesterday to pay $600 million to settle charges with federal and state regulators that one of its units engaged in inappropriate mutual fund trading.
The payment, the second-largest levied against a financial institution over the practice, may bring to a close a three-year investigation into the improper trading of mutual funds that has ensnared some of the largest names on Wall Street and the mutual fund industry.
The settlement with the Justice Department, which covers trades totaling more than $2.5 billion made from 1999 to 2000, is also the first in the market timing scandal in which an institution has admitted to criminal wrongdoing.
Such a concession by Prudential, part of a deferred prosecution agreement that will last five years, underscores the extent to which the improper trading practices were not only widespread at Prudential Securities, but also condoned by its top executives, despite repeated complaints from the mutual fund companies.
"The deceptive trading practices at Prudential were compromising the integrity of many mutual funds," Paul J. McNulty, the deputy United States attorney general, said yesterday in a statement. "Investors were dealt a bad hand by corporate con men who stacked the deck against them."
As part of the settlement, Prudential agreed to cooperate in the investigation and to make periodic reports on its compliance to the government.
The infractions occurred at Prudential Securities, now called the Prudential Equity Group, then the brokerage division of Prudential. In July 2003, Prudential Financial transferred the assets in the unit to a newly formed joint venture owned by itself and Wachovia, currently called Wachovia Securities.
Market timing itself, which involves rapid-fire trading of mutual fund shares so as to capture price inefficiencies, is not illegal. The practice is discouraged by most major fund companies, however, as it can hurt shareholders by adding to costs and disrupting investment portfolios.
Since the investigation into market timing became public in the fall of 2003, regulators have imposed more than $4 billion in fines and penalties, including $675 million paid by Bank of America in March 2004 and $600 million by AllianceBernstein in 2003. Bear Stearns paid $250 million earlier this year to the Securities and Exchange Commission to settle charges that it facilitated improper fund trades for its clients. The firms did not admit or deny any wrongdoing.
The complaint against Prudential focuses on four brokers in the firm’s New York City offices. According to regulators, the four men concocted an elaborate scheme to facilitate as many as a thousand transactions a day for their hedge fund clients by going to great lengths to disguise the origins of the trades. The business was very profitable for Prudential and the brokers reaped the rewards, the complaint said. Frederick J. O’Meally, the team leader, was paid $4.7 million from 2001 to 2003, making him the top-producing broker at Prudential during this time.
"We take these matters very seriously and deeply regret the conduct of some former employees that led to these problems," said Arthur F. Ryan, the chief executive of Prudential Financial, in a statement.
Regulators charged that senior executives at Prudential Securities were aware of aggressive trading practices but did not move strongly enough to rein their brokers in.
According to the complaint, the brokers used more than 750 different account names to cloak the aggressive trading of their hedge fund clients, which included Millennium Partners and Canary Capital Partners, two funds that were among the most active market timers. They focused on as many as 25 mutual funds, including Putnam, Janus and Fidelity. Both Millennium Partners and Canary Capital Partners have reached settlements with regulators.
The complaint againts Prudential said that the mutual funds did all that they could to put a halt to the trades, from screening transactions of large amounts put through by the same broker, to banning certain accounts from trading.
"We need this business shut off at the rep level," an executive at Franklin Templeton wrote in an e-mail message to his counterpart at Prudential, in discussing Mr. O’Meally’s trading. "We don’t want any business from him regardless of the account."
But the Prudential brokers were not to be deterred, the complaint said, and they circumvented these measures by creating more accounts and splitting up the sizes of trades.
"Your last trades were for almost $500,000 each," Michael L. Silver, one of the brokers involved, advised a client in an e-mail message, according to the complaint. "Let’s use two funds per account for $250,000 each to hide better!"
On another occasion, Mr. Silver told a client that he was moving funds to another account. "This will buy us extra time to trade at Pilgrim," he wrote. "I don’t know how long, but it will help."
In addition to Mr. O’Meally, 45, and Mr. Silver, 35, two other brokers were named in the complaint, Brian P. Corbett, 34, and Jason N. Ginder, 42. All four men have either been fired or have resigned from Prudential.
The four have been sued by the S.E.C and face the prospect of fines, the return of ill-gotten gains and a possible ban from the industry. They could not be reached for comment.
The settlement against Prudential is also the latest to use deferred prosecution — an increasingly common tactic among prosecutors in white-collar cases. A year ago, the accounting firm KPMG avoided indictment and reached a $456 million deferred-prosecution agreement over its role in the development of questionable tax shelters.
And early this month, prosecutors agreed to drop obstruction charges against the investment banker Frank P. Quattrone as long as he does not violate any laws within a year.
This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.