Federal prosecutors in Massachusetts are considering filing criminal charges against former

Prudential Securities

broker Martin Druffner, who securities regulators contend generated $3.2 million in commissions from placing unethical mutual fund trades for a group of wealthy hedge funds.

Druffner, who had worked in Prudential's Boston office, has received a so-called target letter from U.S. Attorney Michael Sullivan, notifying him that he could face criminal charges, people familiar with the investigation say. The target letter was sent to Druffner's attorney, the sources say.

Another former Prudential broker, Skifter Ajro, who was part of a three-member team led by Druffner, also could face criminal charges, sources say.

"I acknowledge receiving a written communication from the U.S. Attorney on behalf of Mssrs. Druffner and Ajro, but otherwise decline to comment," said Michael Collara, the Boston attorney representing the two men.

Last year the

Securities and Exchange Commission

, in an amended civil complaint, charged Druffner, Ajro and three other brokers in Prudential's Boston office with defrauding 52 mutual fund companies by making more than $1.3 billion in "market-timing" trades over three years. The SEC also filed civil charges against Robert Shannon, the former branch manager of the Boston office.

The SEC contends the brokers defrauded the fund companies by using dozens of false accounts to hide their identities and make it difficult for the fund companies to detect their rapid trading of mutual fund shares.

Federal prosecutors have been investigating the trading activity of the Boston brokers for more than a year.

In fact, a few months after Massachusetts securities regulators filed their own civil charges against Druffner and his colleagues in November 2003, federal prosecutors sent a target letter to the most junior member of the brokerage group, Justin Ficken. So far, no criminal charges have been filed against Ficken.

Ficken's attorney, Brad Bailey, did not return a phone call. Steven Fuller, the attorney representing Shannon, the former branch manager, said his client has not received any target letter from federal prosecutors.

The criminal investigation has moved slowly because the SEC did not allege that brokers engaged in late trading, a practice where mutual fund shares are bought after the market close at stale prices that don't reflect after-hours news. Prosecutors and regulators have deemed late trading to be a blatantly illegal offense. To date, most of the criminal prosecutions in the long-running mutual fund scandal have involved some allegation of late trading.

Market-timing, by contrast, is legal, but it 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 three former executives of Mutuals.com.

Jim Gorman, a spokesman for

Prudential Financial

(PRU) - Get Report

, declined to comment.

Prudential Securities is now called

Wachovia Securities

, which is a joint venture between Prudential and

Wachovia

(WB) - Get Report

. Prudential, which is the minority shareholder in Wachovia Securities, has agreed to indemnify the Charlotte, N.C.-based bank for any damages and lawsuits arising out of the mutual fund scandal.

In a related development, people familiar with the criminal investigation say federal prosecutors have expanded their investigation to look at the trading activity of other brokers, including former Prudential broker Frederick O'Meally, who had worked out of the Garden City, N.Y., branch office on Long Island. People familiar with O'Meally's trading say he reportedly had a bigger book of market-timing business than Druffner and the other Boston brokers.

O'Meally's lawyer, Peter Fleming, was unavailable for comment.

Both Druffner and O'Meally have ties to

one of the biggest market-timing brokers of them all, Michael Sassano, the former

Oppenheimer & Co.

(OPY) - Get Report

employee, who remains under investigation by New York Attorney General Eliot Spitzer, the SEC and the

New York Stock Exchange

. In the past few weeks, investigators have interviewed a number of people who worked with Sassano, sources say.

Sassano, who led a team of 15 traders and brokers at Oppenheimer, earned $15 million in commission during his best year, sources have told

TheStreet.com

. (

Sassano's history has been

extensively chronicled on this Web site.) Oppenheimer formerly was part of the

Canadian Imperial Bank of Commerce

(BCM) - Get Report

.

Sassano and Druffner went to college together. Sassano and O'Meally worked together at

Lehman Brothers

( LEH) and were close friends, sources say.

Over the years, Sassano routinely referred some of his hedge fund customers to Druffner and O'Meally.

In fact, four of the hedge funds that Druffner allegedly did trading for, Chronos Asset Management of Cambridge, Mass.; U.K.-based Headstart Advisors; London-based Pentagon Capital Management, and New York's Jemmco Advisers, were referred to him by Sassano.