Prudential pays US$600 million to settle market-timing charges
Putting an end to a three year old investigation on Monday, Prudential Financial Inc. agreed to pay US$600 million to settle allegations with federal and state regulators that one of its units engaged in inappropriate mutual fund trading.
The brokerage unit, Prudential Equity Group, LLC, confessed of criminal wrong-doing in the scheme dating back to 1999, the U.S. Justice Department said.
The payment would be the largest market-timing settlement involving a single firm and would bring to end civil and criminal probes and allegations by the Department of Justice, the Securities and Exchange Commission and several other regulators including New York Attorney General Eliot Spitzer.
About the improper trading of mutual funds that have entrapped some of the largest names on Wall Street and the mutual fund industry, the parent company, Prudential Financial’s Chief Executive Arthur Ryan said in a statement: "We take these matters very seriously and deeply regret the conduct of some former employees that led to these problems." The company entered into a compliance agreement with the Justice Department to co-operate in the investigation and to maintain policies to insure affiliated entities follow the law. "We have strengthened our compliance programs," Ryan said.
The settlement with the US Justice Department comprises trades totaling more than $2.5 billion made from 1999 to 2000. "This resolution goes a long way in restoring the public trust," Deputy Attorney General Paul McNulty told reporters at the Justice Department.
Prudential will pay the penalties in different segments. Of the $600 payment, it will pay $270 million to victims of the fraud, $300 million criminal penalty to the U.S. government, $25 million fine to the U.S. Postal Inspection Service consumer fraud fund and $5 million civil penalty to Massachusetts, as per confirmed by the Justice Department.
The complaint against Prudential concentrates on four brokers in its New York offices. According to regulators, the men formulated a scheme to facilitate as many as a thousand transactions a day for their hedge fund clients by going at great lengths to disguise the origins of the trades.
The business was very profitable for Prudential as well as for the brokers, the complaint said. By placing their trades in multiple accounts, usually with multiple identities, the brokers were able to evade efforts by the mutual funds to block the market timing, the regulators said.
Meanwhile, all four convicts have either been fired or have resigned, and have been sued by the Securities and Exchange Commission. Regulators also charged that senior executives were aware of the aggressive trading practices but did not move strongly enough to hold their brokers back.
However, the market-timing, which involves rapid-fire trading of mutual fund shares so as to capture price inefficiencies, is not necessarily illegal, but most funds forbid it because heavy trading of fund shares often hurts profits for long-term fund shareholders.
Prudential shares jumped 1.1% to close at $73.72 on Monday.


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