The day of reckoning is approaching for
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.''
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.
To date, Galvin's office is the only regulatory agency formally to file charges against Prudential in connection with the mutual fund investigation. However, both Galvin and the SEC, in separate actions, have filed civil charges against the three brokers now facing potential criminal charges from U.S. prosecutors.
People familiar with the investigation by U.S. Attorney Michael Sullivan say a decision to charge the brokers should come by Aug. 2. In June, Sullivan's office asked the federal judge overseeing the pending SEC case against the brokers to stay the legal proceedings until that date.
Legal experts say it's not uncommon for prosecutors to seek a stay in a related civil proceeding when they are they on the verge of indicting a defendant.
reported that federal prosecutors had notified Druffner and another broker, Skifter Ajro, that they could face criminal charges in conjunction with the investigation. A third broker, Justin Ficken, received a so-called target letter from prosecutors more than a year ago.
The attorneys for the brokers, all of whom had worked in Prudential's Boston office, declined to comment.
The SEC, in a complaint filed last year, charged that Druffner and his two associates used dozens of false accounts to hide their identities and make it difficult for mutual fund companies to detect their market-timing activities. Regulators contend that Druffner, the leader of the group, generated $3.2 million in commissions from his frequent trading of mutual fund shares over a three-year period.
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
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.