Updated from 10:40 a.m. EST

The mutual fund trading scandal marched on Tuesday with securities regulators filing civil fraud charges against seven former

Prudential Securities

employees.

The latest round of charges in the investigation of the $7 trillion mutual fund industry stem from allegations that a group of Boston-based Prudential brokers engaged in improper trading in shares of dozens of mutual funds.

In a complaint filed in federal court in Boston, the

Securities and Exchange Commission

contends the Prudential brokers defrauded themutual funds by "misrepresenting their own identifies or the identities of their brokerage customers" to engage in thousands of improper trades.

Massachusetts securities regulators, in a separate but related state court civil complaint, placed many of the improper trades to benefitseveral hedge fund customers.

The brokers, who generated millions of dollars in commissions from their illegal trades, continued to flout the industry's rules despite protests by the mutual fund companies to Prudential's operationsdepartment. Those protests, according to the dual complaints, apparently fell on deaf ears at Prudential management.

Massachusetts Secretary of the Commonwealth William Galvin accused Prudential's top brass of having a "see-no-evil attitude" and reluctant totake steps that might drive away customers with big accounts.

Prudential is now a joint venture run by

Wachovia

(WB) - Get Report

and

PrudentialFinancial

(PRU) - Get Report

, with Wachovia owning a majority interest in the brokerage.

Specifically, regulators contend the Prudential brokers engaged in market timing, an arbitrage strategy in which time differences between theclosing of U.S. and foreign exchanges are exploited. Most mutual funds say they prohibit market timing because the rapid in-and-out trading can dilutethe value of a fund's holdings and hurt other investors.

The defrauded mutual funds actually tried to stop the improper trading activity, but couldn't. Regulators said that over a two-year stretchending in September 2003, at least 68 mutual fund companies sent letters to Prudential Securities complaining about market-timing trades being made bybrokers in the firm's Boston office. The funds generated more than 25,000 "warning" notes about the brokers alleged behavior.

The mutual funds even began to block some trades by the Prudential employees, but the brokers evaded those maneuvers by concealing their identities.

"That's fraud, plain and simple," said SEC Director of Enforcement Stephen Cutler.

The former brokers facing securities fraud charges are Martin Druffner, Justin Ficken, Skifter Ajro, John Peffer and Marc Bilotti. Also chargedwere Robert Shannon and Michael Vanin, former branch managers, who allegedly assisted the brokers in their improper trades.

Both the SEC and Massachussetts filed charges against Druffner, Ficken and Ajro. But only the SEC charged Peffer and Bilotti. Massachusetts,meanwhile, filed the only charges against Vanin.

Not charged with any wrongdoing was Prudential, even though the brokerage appeared to turn a deaf ear to many of the complaints registered by the mutual funds firms.

Officials at Prudential Financial and Wachovia could not be reached for comment.

Massachussetts officials contend Prudential management may have looked the other way at market timing activities of the Boston brokers because it"was imperative for Prudential to keep revenue up because of the merger with Wachovia Securities." The deal was completed this past July.

Massachusetts also did not bring any charges against the hedge funds named in the complaint, who are said to have benefited from the brokers'improper trading. Those hedge funds are Chronos Asset Management and Head Start Asset Management.