Prudential Securities fined $600m by US regulators

Source: NASD

NASD, federal and state securities regulators and the Department of Justice today announced parallel settlements and a total of $600 million in monetary sanctions against Prudential Securities, Inc. (PSI) - now known as Prudential Equity Group - for misconduct relating to improper market timing. NASD's settlement with PSI resolves charges of fraudulent activities and supervisory deficiencies relating to mutual fund market timing and for recordkeeping violations.

PSI also entered into separate settlements with the Department of Justice, the Securities and Exchange Commission (SEC), the New York Attorney General's Office, New York Stock Exchange Regulation, the New Jersey Bureau of Securities and the Massachusetts Securities Division to resolve charges relating to this misconduct.

PSI has been ordered to pay $270 million into a distribution fund administered by the SEC, which will be used to compensate the affected mutual funds and shareholders for losses sustained as a result of the improper market timing activity. The Department of Justice imposed an additional fine of $325 million, and the Massachusetts Securities Division imposed a separate $5 million civil penalty.

In its investigation, NASD found that from at least Jan.1, 2001, to July 1, 2003, certain of PSI's registered representatives engaged in deceptive activities in order to make improper market timing transactions in mutual funds on behalf of their clients. As a result, at least 1,600 customer accounts were collectively able to purchase and sell mutual fund shares worth more than $116 billion, earning those clients more than $162 million in net profits. Those market timing transactions also earned PSI nearly $50 million in gross commissions.

"The scale of the fraudulent market timing activity that was allowed to occur through this firm and that went unchecked by the firm's supervisory systems is unprecedented," said NASD Senior Executive Vice President Stephen Luparello. "The firm was aware that this activity was occurring and yet failed to take action to halt the conduct - except in its own proprietary mutual funds."

NASD found that the PSI brokers defrauded mutual funds and their shareholders by misrepresenting their own identities and the identities of their brokerage clients to engage in market timing after the mutual funds had placed blocks attempting to prohibit such trading. The brokers used multiple customer account numbers and representative numbers (also referred to as "FA numbers" at the firm) to evade the trading restrictions ("blocks") that certain mutual funds imposed on market timing transactions. For example, following the imposition of a block, the brokers placed the market timing trades in another account or, if an FA number had been restricted, the brokers placed trades using another FA number. PSI failed to prevent this activity.

NASD found that PSI received in excess of 1,000 letters and e-mails from more than 50 different mutual fund companies relating to the market timing activities of just five brokers in its Boston branch office. In numerous cases, PSI did not prevent subsequent trading that circumvented these blocks. In January 2003, based on the number of block letters it had received, PSI announced a market timing policy, two years after it had already stopped market timing in its proprietary mutual funds. The policy required PSI's brokers to adhere to the restrictions on the frequency of trading set forth in each mutual fund's disclosure documents. PSI, however, did not enforce that policy and the improper market timing continued.

In addition, NASD found that even though the firm had been aware since at least 1998 that several of its offices had brokers that primarily engaged in market timing transactions, PSI failed to have an adequate supervisory system and written supervisory procedures relating to market timing activities, mutual fund exchanges and detecting and preventing any late trading of mutual fund shares.

Late trading is the unlawful practice of placing mutual fund orders after the fund has calculated its daily net asset value (NAV) - typically at 4 p.m. EST - but receiving the price based upon that earlier, 4 p.m. calculation. Firms accepting mutual fund orders after the 4 p.m. NAV calculation are supposed to execute them at the following day's NAV. Firms executing mutual fund orders must establish and maintain supervisory systems and procedures reasonably designed to detect and prevent the occurrence of late trading.

NASD found that PSI, like other firms, processed mutual fund orders after the market close. PSI, however, lacked a reasonably designed supervisory system to ensure that only orders submitted by the customers before the market close received that day's NAV. Moreover, the volume of market timing business in the Boston branch office created significant risk of late trading. Nevertheless, certain PSI brokers routinely failed to document the time the customer order was received. Therefore, PSI would not have been able to detect and prevent any unlawful late trading in mutual fund shares.

Finally, NASD found that PSI failed to maintain accurate books and records relating to mutual fund transactions.

In concluding this settlement, PSI neither admitted nor denied NASD's charges, but consented to the entry of NASD's findings.

Comments: (0)