Two former Prudential Securities office managers admit that some brokers they oversaw in Boston used market-timing trades to reap profits from mutual funds, but they also claimed in formal responsesto regulatory charges that the trading had been authorized by top Pru officials.
The former Hub branch managers made those assertions in legal responses obtained by the Herald yesterday. Both denied civil fraud charges brought against them by Secretary of State William Galvin.
Former Hub branch managers Michael Vanin and Robert Shannon, who took over after Vanin left in late 2001, also denied Galvin’s claim that they permitted brokers to deceive fund firms.
Galvin filed civil fraud charges last month against the two managers, as well as three former Pru brokers, claiming they used deceptive practices to let hedge fund clients make improper short- term trades. Galvin’s complaint coincided with similar charges brought against Shannon and several brokers by the Securities and Exchange Commission.
Shannon has not yet responded to the SEC charges, and the other brokers have not responded to the charges, regulators said.
The charges came as state and federal regulators widened their probes into market-timing activities. While not illegal, regulators say market-timing – frequent trades in and out of funds – can hurt long-term investors.
Shannon and the brokers named in Galvin’s complaint were pushed out of their jobs in September amid the probes.
But Gary Crossen, Vanin’s lawyer, said market-timing was a legitimate trading strategy.
“It’s not like it was something that was being done under the table,” Crossen said. “Everybody knew about it.”
In the late 1990s, Vanin, at the request of a broker in the Boston office, suggested to Pru executives that market-timing services be offered to clients for a fee, Vanin’s response said. The market-timing proposal was approved by Prudential’s “highest- ranking executives,” the response said.
Vanin also says Prudential brokers had numerous broker I.D. numbers, but those were assigned for legitimate business purposes and not to let them decieve mutual fund operators, as Galvin claims.
Vanin also denies Galvin’s claim that market-timing made the Hub branch one of the company’s top-producing offices. Market-timing accounted for no more than 6 percent of the branch’s revenue while Vanin was there, Crossen said.
Many mutual funds’ policies say their funds shouldn’t be used for market-timing. But Shannon denied that there is an industry rule requiring brokerages to ensure its employees adhere to mutual fund market-timing policies.
Shannon became aware of market-timing in the Hub office soon after starting his job there, but he also said market-timing was authorized by top Pru executives.
Pru spokesman Bob DeFillippo said his firm “continues to cooperate with all regulatory inquiries.”
