The

NASD

censured

Prudential Securities

and fined the firm $100,000 Thursday, accusing Prudential's investment bankers of trying to collude with a rival brokerage firm to increase the underwriting fees in an initial public offering.

Prudential accepted the disciplinary action but neither admitted nor denied wrongdoing. The firm, a unit of the

Prudential Insurance Company of America

, said it has "always been firmly committed to closely following all rules and regulations of the NASD."

The settlement, the first of its sort, stems from the 1996 initial public offering of

First Alliance

(FACO)

, a subprime mortgage lender based in Irvine, Calif. Prudential was accused of trying to persuade the rival firm to join it in raising the underwriting fee to 7%, from 6%, of the proceeds of the stock offering.

The IPO fees of underwriters have been attracting increasing attention. A

University of Florida

study concluded that underwriters are routinely charging a standard 7% fee.

A federal class-action lawsuit against more than a dozen underwriting firms and a wide-ranging

Justice Department

investigation into the underwriting practices of various Wall Street firms are underway. Critics say the practice hurts the people who own stock before a company goes public, usually the founders, because it allows the underwriters to take a bigger share in the initial public offering, partly by setting IPO prices too low.

In this case, Prudential said its pricing practices fairly represent the value of its expertise, research capabilities and breadth of distribution.

First Alliance, which is based in Irvine, Calif., makes home loans to customers with poor credit histories, charging them higher fees and interest than those offered by conventional lenders. The company's chairman, Brian Chisick, decided to take First Alliance public in December 1995, eventually selling 3.5 million shares.

"It's a relatively easy IPO because at the time the subprime financial

sector was pretty hot," he said in an interview Thursday. "It's just plain old horse trading."

Since Prudential financed his company's credit lines, the firm was among the first Chisick invited to bid on the deal.

Around Feb. 16, 1996, Mark K. Mason, First Alliance's chief financial officer at the time, told Prudential and

Friedman Billings Ramsey

, a Virginia regional underwriting firm, that they had been selected to co-manage the offering. At the time, Friedman had made a niche for itself underwriting subprime lenders. First Alliance is one of few left in business.

According to the NASD, Mason told both firms they would have to charge the 6% fee that Friedman had offered. Prudential's bankers said the firm had an internal policy of charging 7% to underwrite offerings for businesses like First Alliance, according to the NASD. The firm said it feared it would alienate previous clients that had paid the higher fee.

Since First Alliance was unwilling, the NASD said, Prudential contacted Friedman's bankers on Feb. 21, 1996, asking them to refuse to participate for less than 7%.

Friedman didn't go along, and the offering finally was made on July 25, 1996, with shares of First Alliance priced at $17, raising $59.5 million. At the 6% rate, Friedman took home the bulk of the underwriting fees, which amounted to $3.57 million. (Twenty other investment banks each underwrote 50,000 shares or fewer, but Prudential was left out.)

At a 7% rate, the fees would have amounted to $4.165 million, an increase of $595,000, NASD noted in its disciplinary note.

That percentage "has been the industry standard, and underwriters haven't been willing to change," said Jay Ritter, a professor of finance at the University of Florida who wrote the report on the issue. While the practice doesn't necessarily hurt public investors, it "hurts founders because they have to sell more shares, which ends in dilution."

Chisick, who owns 68% of the stock in First Alliance, said he is glad he held out for the 6% fee so "the difference could go to our shareholders as opposed to Prudential."

Companies are loathe to complain because they may need the underwriters again for secondary offerings, bond offerings and the like. Chisick said he did not tip off the NASD. Rather, he received a call a year ago from NASD investigators and answered their questions.

But since the public offering, Wall Street appears to be increasingly disinterested in subprime lenders. First Alliance's stock price has fallen to 2 1/16 Thursday from a high of nearly 24, as profits have plunged 88% over the last two years.

First Alliance reportedly spent $7.2 million on legal fees in 1999, defending itself against charges of unfair lending practices in a lawsuit from the

American Association of Retired Persons

and an investigation by the Justice Department and at least seven states.