Massachusetts securities regulators are again gunning for
On Thursday they charged the brokerage firm with permitting a group of brokers in its Boston office to engage in widespread late trading of mutual fund shares. The group is substantially the same as that charged a month ago with running an elaborate system of mutual fund market timing.
Regulators consider late trading a more serious offense because it permits favored customers to buy -- or cancel an order to buy -- shares of mutual funds after the close of the trading day. The late trades enable customers to take advantage of late-breaking news because orders are processed at an old price, rather than the next day's closing price reflecting individual stocks' movement.
Last month Massachusetts officials and the
Securities and Exchange Commission
charged seven former Prudential brokers with improper trading in shares of dozens of mutual funds.
In that action, the brokers were charged with making numerous market timing trades on behalf of their customers. Massachusetts and the SEC alleged the brokers used deception to make those trades by hiding their identities from the mutual fund companies in order to move quickly in-and-out of fund shares.
Market-timing is the term for a legal but strongly discouraged trading strategy in which mutual fund shares are bought and sold frequently to capitalize on price discrepancies in different markets. The rapid-fire trading is harmful for the vast majority of mutual fund investors because it can dilute the value of a fund by driving up trading and administrative costs.
Most fund companies disclose in their prospectuses that they try to ferret out and stop market-timers. But investigators have found that far too many fund companies were willing to bend or ignore those rules when it came to a privileged group of hedge funds and their brokers
The latest charges by Massachusetts Secretary of the Commonwealth William Galvin allege that Prudential executives looked the other way as the group of brokers in Boston made after-hours trades valued at more than $160 million. The group, led by former broker Martin Druffner, allegedly made the trades on behalf of a number of hedge funds.
The civil complaint repeats a number of the allegations contained in the initial filing by Galvin's office. It alleges that top managers at Prudential, which is jointly owned by
, were repeatedly warned by mutual fund companies about the improper trading activities.