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Prudential Ousts 12 Over Probe

Oct 1, 2003 | Prudential Securities has ousted 12 brokers, including the head of its Boston head office, as a result of a US regulator probe into hedge funds' arbitraging of mutual fund shares at the expense of long-term investors.

It is the first sign that stockbroking firms, as well as hedge funds and mutual funds, have been drawn into the widening investigation by Eliot Spitzer, the New York attorney-general.

It follows the suspension on Tuesday of two employees of Alliance Capital, a fund management company owned by French insurance group Axa, over the same matter.

Bank of America and Janus, which were named by Mr Spitzer as having involvement in the dubious trading, have also taken action against employees.

Prudential, a division of Wachovia Securities, has asked for the resignation of six brokers in its Boston office, including the manager. It also fired the branch manager in Garden City, New York, and another five brokers in unspecified locations, according to people who work at Prudential.

William Galvin, the Massachusetts secretary of the Commonwealth, said shortly after Mr Spitzer announced his investigation on September 3 that he was looking into the possible market timing of mutual fund shares by Boston-based Prudential.

The probe centres on the rapid trading, mainly by hedge funds, of international mutual fund shares in a way that takes advantage of discrepancies in asset values across time zones. The trading, known as market timing, is not illegal but is publicly discouraged by mutual funds because it siphons off profits at the expense of long-term investors.

Several fund companies have allegedly flouted their policies by privately endorsing such trading by hedge fund managers in exchange for a cut of profits or asset management business.

Tony Mattera, at Wachovia, would not comment on specific personnel issues but said: "Wachovia's top priority is in ensuring our clients can put their full trust and confidence in our financial advisers. The bank continually conducts internal reviews of its practices and takes appropriate actions if necessary."

The share prices of Alliance, Janus and BofA have all suffered as a result of the crackdown, and Janus is believed to have been holding settlement talks with Mr Spitzer's office.

The company said on Tuesday that it had earned about $1m in fees from the controversial trading, and it would refund this to investors.

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