Dec. 12–Massachusetts on Thursday charged Prudential Securities with improper mutual fund trading and demanded the company, now part of Wachovia Corp., pay restitution to investors.
Prudential failed to supervise brokers and branch managers in its Boston office and “knowingly furthered a fraudulent scheme” that included market timing and illegal late trading of mutual funds, according to a civil complaint filed by the Massachusetts Secretary of the Commonwealth.
The complaint demands that Prudential conduct an audit to determine losses by investors and seeks an unspecified fine. Over the past 2 1/2 years, brokers in Prudential’s Boston office made more than 1,100 late-trading transactions, valued at more than $162 million, on behalf of hedge fund customers, regulators allege.
Prudential is one of many investment firms to face allegations in ongoing probes of the $7 trillion mutual fund industry. Market timing, banned by many funds, is rapid-fire trading in and out of mutual funds, while late trading is illegal trading of mutual funds after 4 p.m., when U.S. markets close. These types of trades can hurt smaller investors by incurring extra fees and diluting their holdings.
“This is yet another example of Wall Street putting the interests of favored clients ahead of retail investors,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. “It’s a dismaying but by now familiar pattern.”
Prudential Securities became part of Charlotte-based Wachovia’s brokerage arm through a joint venture formed July 1 with Newark, N.J.-based Prudential Financial Inc. Wachovia holds a 62 percent stake in the merged Wachovia Securities, while Prudential Financial has 38 percent.
Under the merger agreement, Prudential is responsible for all liabilities prior to the joint venture and nine months afterward. Both Wachovia and Prudential declined comment on the charges.
“We continue to cooperate with regulators and work with Wachovia Securities to review the practices of former Prudential Securities brokers in Boston,” said Prudential spokesman Jim Gorman. “The review is not complete yet.”
Last month, Massachusetts and the Securities and Exchange Commission filed civil charges against individual brokers and branch managers in Prudential’s Boston office.
Thursday’s complaint says their alleged trading scheme would not have been successful without “the complicity of Prudential management — including branch managers, compliance and risk personnel” and Michael Rice, the former president of the Prudential Securities private client group. Rice became president of the combined Wachovia Securities’ private client group in July and left in October for a position at Prudential Financial.
Among recent mutual fund scandals, the complaint stands out because of “allegations that misbehavior went to the very top of the Prudential hierarchy,” said John Freeman, a University of South Carolina law professor who has written extensively about mutual fund fees. “This is not just a few lower-level, lone-wolf-type renegade brokers.”
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