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Prudential Unit Faces Accusations

Dec 12, 2003 | USA TODAY

Massachusetts Secretary of State William Galvin accused Prudential Securities Thursday of widespread late trading of mutual funds on behalf of its hedge fund customers.

Galvin said that over the past 21/2 years, Prudential brokers in Boston allowed more than 1,100 late trades, with a total value of $162 million.

Branch managers and executives in Boston and New York were complicit in the scheme, the complaint says.

They allegedly encouraged late trading and market timing, and were reluctant to forgo the substantial profits generated by courting the hedge fund accounts.

"This is yet another example of Wall Street putting the interests of favored clients ahead of retail investors," Galvin said.

Bob DeFillippo, a spokesman for Prudential Financial, said that the firm would need time to review the allegations before commenting.

In July, Wachovia Corp. acquired a majority interest in Prudential Securities, now known as Wachovia Securities.

Prudential Financial is responsible for all activities prior to the acquisition.

"We continue to cooperate fully with all regulatory inquiries, and we are working with Wachovia Securities to review the trading practices of our former Prudential Securities brokers," DeFillippo said.

He emphasized that the charges don't involve the firm's own mutual funds.

Late trading is the illegal practice of buying and selling funds after the 4 p.m. ET market close but still getting the 4 p.m. price. It hurts buy-and-hold investors by lowering returns and driving up fees.

Market timing involves frequent trading, often in international funds, to exploit "stale" prices due to time zone differences.

It is legal but might violate a fund's rules. It typically gives market timers a profit at the expense of long-term shareholders.

Last month, Galvin and the Securities and Exchange Commission accused seven former Prudential Securities employees of using dozens of fake identities to evade mutual fund rules against market timing, reaping millions in profits.

In filing civil fraud charges against the company on Thursday, Galvin said Prudential ignored an incredible influx of letters from mutual fund companies, warning about violations of their market-timing policies.

The complaint also details how the late trading allegedly took place: Hedge fund clients would fax pending mutual fund trades during the day, and Prudential brokers would time-stamp them and set them aside.

If the client called after 4 p.m. to confirm the order, the brokers would allegedly forward them with the pre-close time stamp.

If the client canceled the order after the 4 p.m. close, the brokers allegedly would cross out that trade.

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