BOSTON (AP) — The growing mutual fund scandal struck Prudential Securities Inc. on Tuesday as state and federal regulators filed civil charges against former brokers and branch managers atPrudential’s Boston office alleging improper trading.
The complaints by the Securities and Exchange Commission and Massachusetts Securities Division allege that former brokers took a variety of steps, including using false identities, to disguise market timing to enrich themselves and the hedge funds whose money they were investing.
The state complaint alleges the defendants made thousands of market timing trades, and that Prudential ignored as many as 30,000 warning letters in the past year sent by the outside mutual funds in which the brokers were allegedly trading making quick trades in and out, a practice called market timing.
While market timing is not illegal, many companies prohibit it because it can allow short-term investors to profit at the expense of long-term shareholders in mutual funds.
The SEC complaint names former brokers Martin J. Druffner, Justin F. Ficken, Skifter Ajro, John S. Peffer and Marc J. Bilotti and former branch manager Robert Shannon. The Massachusetts complaint names Druffner, Ficken, Ajro, Shannon and Michael Vannin, also a branch manager.
“Our complaint alleges that by concealing or misrepresenting their own identities or the identities of their clients, the defendants were able to circumvent restrictions intended to protect mutual fund shareholders against excessive market timing,” said Stephen M. Cutler, director of the SEC’s Division of Enforcement. “That’s fraud, plain and simple.”
Prudential, though not named as a defendant in the SEC complaint, is the latest company embroiled in the growing scandal over mutual fund market timing. Last week, the SEC and Massachusetts regulators brought civil enforcement actions against Boston-based Putnam Investments for allegedly turning a blind eye to market timing trades by some customers and employees.
A source familiar with the matter told The Associated Press on Monday that Prudential was expected to be added as a defendant within a few weeks, and the Massachusetts complaint criticized the company even though it did not name it as a defendant.
The action came a day after the head of the SEC’s Boston office resigned following criticism his office did not respond aggressively enough to a whistleblower’s complaint about alleged improper market timing at Putnam Investments, which was cited in complaints filed by the regulators last week.
A Prudential spokesman did not immediately return a phone message seeking comment, nor did an attorney representing the brokers. On Monday, when it was first reported the civil actions were to be filed imminently, the company said it was cooperating fully but had no further comment.
Vanin left Prudential in 2001, Massachusetts regulators said, while the others resigned in September.
The SEC complaint alleges the brokers violated federal securities law and that former branch manager Robert Shannon “substantially assisted” the brokers by, among other things, approving market timing trades.
The SEC said it would seek injunctive relief, penalties and disgorgement, a request common in such proceedings to refund investors for any lost profits.
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On the Net:
SEC: www.sec.gov
Massachusetts Securities Division: http://www.state.ma.us/sec/
