confirmed that Massachusetts securities regulators are looking into allegations a Prudential Securities office in Boston permitted investors to engage in market timing in the trading of mutual fund shares.
Sources said Massachusetts officials served the subpoena on Wednesday afternoon, just hours after New York Attorney General Eliot Spitzer announced a $40 million settlement in a similar probe. In that case, a hedge fund participated in an illegal trading scheme allegedly with mutual fund families at
Bank of America
Prudential Securities was not one of the mutual fund companies identified in the civil complaint Spitzer's office filed with a New York state court.
Prudential, in a statement, said it is cooperating with the inquiry led by Massachusetts Secretary of the Commonwealth William Galvin. The Newark-based financial services firm said that "to the best of its knowledge, all such trading in mutual fund shares was proper."
In July, Prudential and
merged their retail brokerage operations, with North Carolina-based Wachovia owning a majority share in the business. A Wachovia spokesman declined to comment on the investigation.
But there are signs the Prudential investigation is widening.
Bill Singer, a New York securities lawyer, said Friday he has been contacted by several current and former Prudential brokers who are interested in providing regulators with information. Singer said his clients, whom he called "whistleblowers," could begin talking to regulators as soon as next week. But Singer said his clients would prefer to talk to regulators at the NASD, which has been looking into problems in the mutual fund business for more than a year.
Market timing is a practice in which investors, usually institutions like hedge funds, make short-term swing trades in a stock or a mutual fund and try to take advantage of brief price movements. The practice is not illegal, but most mutual fund companies contend they prohibit this kind of trading because it can dilute the value of a fund by incurring unnecessary trading costs.
Market timing is one of the trading practices Spitzer's office contends the four fund companies he's investigating had engaged in with the Canary Capital hedge fund. Spitzer also alleges that Bank of America's fund company permitted Canary to "late trade," or purchase shares in a mutual fund after the close of the trading day, but at their 4 p.m. price.
Securities and Exchange Commission
also is jumping on the mutual fund trading bandwagon. SEC Chairman William Donaldson is sending letters to most of the nation's big mutual funds inquiring about their trading practices.
In a letter sent Thursday to the Investment Company Institute, a mutual fund industry trade group, Donaldson said federal regulators are "conducting a vigorous and broad-based investigation into these types of abuses" and "will bring appropriate and meaningful enforcement actions."