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Mass. Regulator Charges Prudential

Dec 12, 2003 | AP

Massachusetts' top financial regulator is accusing Prudential Securities Inc. of late trading for lucrative hedge fund customers, calling the charges part of a pattern in which smaller investors were placed at a disadvantage.

Secretary of State William F. Galvin charged Prudential Securities with widespread late trading of mutual funds. The allegations, which were expected, came a month after Galvin charged five former Prudential brokers with fraud in a related mutual fund market timing and late trading scheme.

Late trading allows a favored investor to take advantage of any events after the market closes that are not reflected in the fund's closing price. Regular investors at that hour would have had to take a chance on the next day's closing price, since mutual funds are priced only once per day.

"This is yet another example of Wall Street putting the interests of favored clients ahead of retail investors," Galvin said of the charges he brought Thursday. "It's a dismaying but by now a familiar pattern."

The scandal has raised questions about whether smaller investors are being cheated as they put their money into what has traditionally been considered a relatively safe investment.

Bob DeFillippo, a spokesman for Prudential Financial Inc., said Prudential officials hadn't seen the complaint or the evidence supporting it. But "we continue to cooperate fully with all regulatory inquiries," he said.

Charlotte, N.C.-based Wachovia Corp. acquired Prudential Securities in July and the firm is now known as Wachovia Securities LLC. But Prudential Financial retains minority ownership of the company, and responsibility for all activities prior to the acquisition.

He said Prudential was working with Wachovia to review the trading practices of former Prudential Securities brokers in Boston, but the reviews were not yet complete.

Galvin said brokers in Prudential's Boston office allowed more than 1,100 late trading transactions in the past 2 1/2 years with a total value of more than $162 million.

The administrative complaint seeks restitution and an unspecified fine. Brian McNiff, a spokesman for Galvin, said it wasn't clear how much impact those trades had on other investors.

Galvin said the late orders were executed even though they violated company policy.

"This scheme was clearly a violation of Prudential's internal controls," he said. "Many people knew this was going on and no one stopped it."


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