Nov. 4–The U.S. Securities and Exchange Commission and Massachusetts regulators plan to levy civil fraud charges today against former Prudential Securities brokers in the latest fallout from awidening probe of the $7 trillion mutual fund industry.
State and federal regulators have been investigating allegations of improper mutual fund trading in the Boston office of Prudential Securities, now part of a brokerage joint venture with Charlotte-based Wachovia Corp. The SEC and the office of Massachusetts Secretary of the Commonwealth William Galvin on Monday confirmed they planned to file charges today, but declined to say how many would be charged.
Attorneys for five brokers and a branch manager who resigned from Prudential’s Boston office in September said they were bracing for charges but also did not provide details.
Wachovia, the nation’s fifth biggest banking company, is the second big Charlotte bank with ties to a broad-ranging investigation of the mutual fund industry sparked by New York Attorney General Eliot Spitzer.
In September, Spitzer said Charlotte-based Bank of America Corp., the nation’s third largest banking company, had the most extensive relationship of any mutual fund company named in a complaint against Canary Capital Partners LLC, a New Jersey hedge fund which agreed to a $40 million settlement over improper trading practices. Ex-Bank of America broker Ted Sihpol was the first individual to face civil and criminal charges in the probe and several other bank employees have been dismissed.
Wachovia and Prudential Securities’ parent company Prudential Financial Inc. on July 1 formed the nation’s third-largest brokerage with $537 billion in client assets.
In the joint venture, Wachovia was looking to expand a brokerage force that it had built through a series of acquisitions of regional firms, while Prudential was looking to refocus on its insurance roots after losing money on the financial advisory business. Wachovia has a 62 percent stake in the venture, while Prudential has 38 percent ownership. The combined brokerage is already operating under the Wachovia Securities name, but computer systems won’t be combined until late next year.
In the third quarter, the deal brought Wachovia about $530 million in additional revenue, but along with that has come additional regulatory scrutiny and an early management shake-up. Michael Rice, the Prudential executive put in charge of much of the brokerage force, left the firm last week for what the companies called personal reasons. He is rejoining Prudential Financial to help the parent company manage its stake in the brokerage outfit.
In the probe of the Boston office, regulators are investigating allegations that brokers helped hedge-fund clients engage in market timing, the practice of trading in and out of mutual funds to make quick profits. It is not illegal, but is typically restricted by mutual funds to protect long-term investors, who can suffer from extra fees incurred from the practice. Spitzer and the National Association of Securities Dealers are also probing Prudential brokers.
Investigators have not detailed when the alleged improper trading occurred. As part of the Wachovia-Prudential deal, pre-existing legal liabilities are the responsibility of the parent companies, which indicates that Prudential would have to pay any fines or penalties. Wachovia and Prudential spokespersons declined to comment on Monday.
The brokers have been cooperating with regulators and believe they committed no wrongdoing, their attorneys said.
Dan Rabinovitz, who represents the five former Prudential brokers, said his clients’ activities “were known to their employers’ management” and that they were upfront with mutual funds about their practices.
“I’m extremely disappointed that these individuals, who truly believe they acted properly, would be charged with trying to deceive anyone,” said Rabinovitz, of the Boston firm Dwyer and Collora.
Steven Fuller, an attorney representing former Boston branch manager Robert Shannon, said his client feels regulators are “acting precipitously and entirely without merit.”
Wachovia shares were unchanged at $45.87 in New York Stock Exchange trading Monday; Prudential shares closed up 39 cents at $39.03.
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