Fund Police Circle Prudential Financial

The day of reckoning is approaching for Prudential Financial(PRU) in the nearly two-year-old mutual fund trading scandal.

The New Jersey-based insurer is close to reaching a settlement with securities regulators and federal prosecutors over the role the firm's brokerage division allegedly played in handling abusive mutual fund trades for nearly a dozen hedge funds, people familiar with the investigation say.

The potential settlement could involve a significant fine levied against Prudential and the filing of a so-called deferred prosecution agreement by federal prosecutors in Massachusetts, sources say.

In a deferred prosecution, authorities agree to not file any charges in a matter as long as a defendant abides by the terms of a negotiated agreement. Deferred prosecutions are becoming an increasingly popular method for federal prosecutors to mete out punishments in corporate crime investigations.

Meanwhile, in a related development, federal prosecutors in Massachusetts are nearing a decision about whether to indict Martin Druffner and two other former Prudential brokers who allegedly placed $1.3 billion in market-timing trades for their hedge fund customers. Sources say a decision on the indictments could come by the end of the month and set the stage for an eventual settlement with Prudential.

A prosecutor with the U.S. Attorney's Office in Boston declined to comment on the investigation, as did a spokesman for the Securities and Exchange Commission. Prudential spokesman James Gorman said the firm will "continue to cooperate with all regulatory inquiries.''

In a move that indicates a settlement with the giant insurer is near, Massachusetts securities regulators agreed Tuesday to give Prudential an additional two months to prepare for an administrative proceeding that was filed against the firm in December 2003. A person close to Massachusetts Secretary of Commonwealth William Galvin says the additional time was granted because the parties are "close to a resolution.''