The mutual fund trading scandal keeps rolling along, with
agreeing Monday to pay a $600 million penalty to regulators and federal prosecutors.
State and federal authorities charge that Prudential's now-defunct brokerage arm harmed long-term investors by engineering a wide-ranging campaign to market-time shares of mutual funds for its hedge fund clients. Authorities say the abusive short-term trades generated more than $162 million in profits for Prudential's hedge fund customers.
The penalty is the biggest imposed in the nearly three-year-old scandal that has resulted in about $4 billion in fines and restitution from a wide array of mutual fund firms, Wall Street brokerages and big hedge funds.
The deal with Prudential, which has been in the works for about a year, includes an admission of criminal wrongdoing by the Newark, N.J.-based firm's Prudential Equity Group subsidiary, formerly known as Prudential Securities. The admission of guilt is part of so-called deferred prosecution agreement between Prudential and federal prosecutors in Massachusetts.
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.
Authorities say Prudential's brokers employed a series of deceptive tactics to disguise their market-timing trades and keep the mutual fund families from stopping their frequent trading.
Regulators have alleged that frequent trading of mutual fund shares is harmful to long-term investors because it results increased costs to the fund.
Prudential says the settlement will not result in any charge against earnings. For more than a year, the big insurer has been setting aside money to cover a settlement in a legal reserve account.
In 2003, shortly before the mutual fund trading scandal emerged, Prudential entered into a joint venture with
in which it sold a majority stake in its brokerage business to the North Carolina-based bank. In the deal, Prudential agreed to indemnify Wachovia against any fines or lawsuits arising from the past conduct of its brokers.
A little over a year ago,
first reported that federal prosecutors and Prudential were negotiating the terms of deferred prosecution agreement. Sources say prosecutors were unwilling to sign off on the deal until a final decision was made about pursuing criminal charges against former Prudential employees.
To date, three former brokers in Prudential's Boston office -- Martin Druffner, Skifter Ajro and Robert Shannon -- have pleaded guilty to securities fraud charges.
In a related move, the
Securities and Exchange Commission
said Monday that it had filed civil charges against four other brokers who worked in the New York area. One of those named as a defendant in the SEC action is Frederick J. O'Meally, described by many as the Prudential broker with the largest book of market-timing clients.
Last year, O'Meally tried to enter the hedge fund business, launching a fund called
Corneille that allegedly sought to emulate a market-timing strategy without ruffling any regulatory feathers.
Along with the SEC and the Massachusetts U.S. attorney's office, Prudential also settled with the NASD, the
New York Stock Exchange
and Massachusetts state regulators.