Federal and state authorities on Tuesday accused seven former Prudential Securities employees of fraud related to mutual fund trading, on the same day that the outrage over improper trading hit Janus Capital Group Inc.
The US Securities and Exchange Commission and Massachusetts securities regulators filed charges against five brokers and two managers in Prudential's Boston office, saying they raked in millions of dollars with their superiors' blessing.
In the first sign that Janus will feel investors' wrath, Colorado's biggest public employee pension fund said it was dropping Janus' flagship mutual fund from its employee retirement plan.
And Putnam Investments, which has been in the eye of the mutual fund storm since regulators charged it with fraud last week, could see more hemorrhaging of assets.
The treasurer of California urged the state's two giant pension funds to pull their assets from Putnam.
In another development, New York Attorney General Eliot Spitzer is investigating whether the US arm of Deutsche Bank AG, Germany's biggest bank, helped investors make illegal trades, a person familiar with the situation said Tuesday. The probe could lead to either criminal or civil charges, the person said.
A Deutsche spokesman, Ted Meyer, declined to comment.
In the Prudential case, the alleged fraud was so rife that state authorities said the brokerage received 25,000 to 30,000 letters from clients in the past year warning Prudential about the improper trading.
Massachusetts' top securities regulator, Secretary of the Commonwealth William Galvin, said Prudential executives openly encouraged market timing, which mutual funds discourage.
Lawyers for the accused denied any wrongdoing and said Prudential allowed market timing. The practice usually entails exploiting share price differences across time zones.
"Company policies against market timing and short-term trading were clear," Galvin said in a statement that said brokers connived with managers and were aided by the company's "see-no-evil" stance. "Disciplinary action was nonexistent."
The charges strike another blow to the US$7 trillion industry, which manages the savings of 95 million Americans, and suggest that Prudential actively condoned misconduct. The charges are similar to those filed against Putnam, but industry critics said the misconduct at Prudential was much more widespread.
"This is on a much larger scale and this is not the conduct of a few rogue brokers but Prudential itself, who not only failed to detect but actively encouraged it," said David Marder, a former SEC enforcement lawyer who is now a partner at Robins, Kaplan, Miller & Ciresi LLP in Boston.
Prudential is jointly owned by Wachovia Corp and Prudential Financial Inc.
The former employees became the latest defendants charged with securities fraud in a probe of the mutual fund industry that authorities signaled on Tuesday would expand to how funds are priced.
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