Fund Police Circle Prudential Financial

Market-timing of mutual fund shares, while legal, is prohibited under most mutual fund prospectuses, because it can dilute the value of a portfolio's holdings. Regulators have pursued cases against brokers in which there was evidence of pervasive deception, such as the use of false accounts and identities to mask trades.

The only two criminal prosecutions that have centered around allegations of deceptive market-timing were cases brought against the principals of Geek Securities, a small Florida brokerage, and the top executives of Mutuals.com, a Dallas-based brokerage. In the Geek prosecution, the defendants pleaded guilty. The charges are still pending in the cases of three former executives of Mutuals.com.

Some legal observers had thought prosecutors would be reluctant to bring any new cases after the recent acquittal of former Bank of America(BAC) broker Theodore Sihpol in a mutual fund trading case. The acquittal was a blow to the reputation of New York Attorney General Eliot Spitzer, who initiated the investigation into improper trading practices in the $8 trillion mutual fund industry.

Sihpol was acquitted on 29 of 33 counts of larceny and fraud by a jury in Manhattan on June 9. He had been charged with helping a hedge fund engage in late trading of mutual fund shares; this is generally viewed as a more serious violation than market-timing. The judge in the case declared a mistrial on the four remaining charges, and Spitzer's office is still deciding whether to seek a retrial on those alleged offenses.

In post-trial interviews, several jurors said they voted to acquit Sihpol because they felt prosecutors had unfairly singled him out. The former broker was the only Bank of America employee to be charged criminally in the investigation.

If prosecutors decide to file charges against the former Prudential brokers, it's likely that defense lawyers similarly will argue that their clients are being unfairly singled out for punishment.

In the early days of the trading scandal, up to a dozen Prudential brokers and supervisors in Boston and New York were forced to resign over the scandal. Supporters of the three brokers have argued that their trading activities were well-known within the brokerage firm and approved by their supervisors.

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