Commission Also Charges Four Individuals with Fraud
Washington, D.C., Aug. 28, 2006 – LAWFUEL – Press Release Service – The Securities and Exchange Commission today announced settled enforcement proceedings against Prudential Equity Group, LLC (PEG), formerly known as Prudential Securities Inc. (PSI), alleging that former PSI registered representatives defrauded mutual funds by concealing their identities, and those of their customers, to evade mutual funds’ prospectus limitations on market timing. PEG has been ordered to pay a total of $600 million pursuant to a global civil and criminal settlement with the United States Attorney’s Office for the District of Massachusetts, the Commission, the Massachusetts Securities Division, NASD, the New Jersey Bureau of Securities, the New York Attorney General’s Office and the New York Stock Exchange.
Under the terms of the settlement, $270 million will be paid to a distribution fund administered by the Commission for the benefit of those harmed by the fraud, $325 million will be paid as a criminal penalty to the U.S. Department of Justice, and $5 million will be paid as a civil penalty to the Massachusetts Securities Division. PEG is a registered broker-dealer and investment adviser subsidiary of Prudential Financial, Inc., headquartered in New York, N.Y.
In a related matter, the Commission today filed an unsettled civil injunctive action in the United States District Court for the Southern District of New York against former PSI registered representatives Frederick J. O’Meally, Jason N. Ginder, Michael L. Silver, and Brian P. Corbett. The Commission previously sued five former PSI registered representatives and the former branch manager of PSI’s Boston, Mass., branch office for similar conduct.
Linda Chatman Thomsen, Director of the SEC’s Enforcement Division, said, “Today’s action is the result of unprecedented cooperation among criminal and civil regulators in pursuit of a common goal: the protection of investors. Prudential’s $270 million payment will help compensate the victims of this fraud, which harmed dozens of mutual funds and their shareholders.”
David P. Bergers, District Administrator of the SEC’s Boston District Office, said, “Today’s settlement reflects the pervasive nature of the fraudulent conduct by former PSI registered representatives. Prudential Securities knew of their deceptive market timing practices yet failed to take appropriate action. The Commission will continue to hold brokerage firms accountable when they learn of misconduct by their employees and fail to stop it.”
The Commission’s Order against PEG finds that from at least September 1999 through June 2003, former PSI registered representatives deceived mutual funds in order to engage in market timing in the mutual funds’ shares. The Order finds that on numerous occasions when mutual funds tried to prevent or block the registered representatives from market timing under certain broker identifying numbers, known as Financial Advisor, or FA numbers, at PSI, or in certain customer accounts, the registered representatives used deceptive market timing practices to evade the mutual funds’ restrictions and continue to trade. These deceptive practices included the use of multiple FA numbers and multiple customer accounts, many of which bore fictitious names that had no relation to the actual customer’s name; the use of accounts coded as “confidential” in PSI’s systems; and the use of “under the radar” trading to avoid notice by mutual funds. When the mutual funds succeeded in blocking certain FA numbers or customer accounts from further trading, the registered representatives used other FA numbers and customer accounts that had not yet been blocked to evade the mutual funds’ restrictions and continue to trade.
As early as 2000, PSI identified the registered representatives and monitored their revenues and ranks within the firm. Although the firm received hundreds of notices from mutual fund companies that complained about the registered representatives’ conduct, PSI failed to curtail their deceptive market timing practices.
In settling the Commission’s charges, PEG has also agreed to be censured and to retain the services of an independent distribution consultant for the distribution of the $270 million disgorgement. PEG has consented to the issuance of the SEC’s Order without admitting or denying the findings contained therein.
As part of the global civil and criminal resolution, simultaneous with the SEC’s announcement of this action, the United States Attorney’s Office for the District of Massachusetts announced that it had entered into an agreement with PEG concerning substantially the same conduct as identified in the SEC’s Order. The SEC’s Order also was filed contemporaneously with related, settled orders against PEG by the Massachusetts Securities Division, which brought civil charges against PSI in November 2003, the NASD, the New Jersey Bureau of Securities, the New York Attorney General’s Office, and the New York Stock Exchange.
The Commission’s investigation as to other individuals involved in this matter is continuing.