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Wed, Aug 30, 2006 - Page 10 News List

Prudential agrees to US$600m in penalties

SNEAKY The settlement reached with the US Justice Department is one of the largest ever in connection with quick trades timed to take advantage of market closing times


Prudential Financial Inc and a subsidiary have agreed to pay US$600 million in penalties to resolve government allegations of deceptive market timing in the trading of mutual funds, the Justice Department announced on Monday.

The subsidiary, Prudential Equity Group, LLC, admitted to criminal wrong doing in the scheme dating back to 1999, the department said.

The parent company, Prudential Financial, entered into a separate compliance agreement with the Justice Department to cooperate in the ongoing investigation of market timing and to maintain policies and procedures to insure that affiliated entities follow the law.

The settlement is one of the largest resulting from a broad probe of market timing that has rocked the fund industry for the past three years. In 2004, Bank of America Corp agreed to a US$675 million deal.

Criminal information

Charges were outlined in a criminal information prosecutors are filing in federal court against Prudential Financial and the subsidiary. Justice officials have agreed to defer prosecution so long as the companies abide by terms of the agreement.

A criminal information is a criminal charge filed in court by prosecutors, usually when the defendant has agreed to waive grand jury indictment.

The agreement was announced on Monday afternoon at a news conference by Deputy Attorney General Paul McNulty, Securities and Exchange Commission enforcement director Linda Thomsen, US Attorney Michael Sullivan of Boston, and Peter Zegarac, chief of the Boston district of the US Postal Inspection Service.

The government accused New York-based Prudential Equity Group of engaging in deceptive late market timing in the trading of mutual fund shares. The US$600 million in fines, restitution and penalties would resolve all civil and criminal allegations.

The US$600 million includes US$270 million to be paid into a fund administered by the SEC for investors harmed by the fraud, US$325 million to be paid to the Justice Department and a US$5 million civil penalty to be paid to the Massachusetts Securities Division, which regulates securities trading.


In addition to those penalties, Prudential Equity Group was censured by New York Stock Exchange regulators.

The agreement was reached with both Prudential Equity Group and its parent company, Prudential Financial Inc of Newark, New Jersey.

The discovery of widespread market timing triggered a scandal as state and federal regulators filed a wave of lawsuits in late 2003. Before Prudential's settlement, 15 firms had reached settlements totaling more than US$3.5 billion.

The Prudential settlement stems from civil charges filed about three years ago. The lawsuit alleged that five former Prudential Securities brokers and their branch manager in Boston helped sophisticated investors make more than US$1.3 billion of market-timing trades in mutual-fund shares. The suit alleged that this rapid trading raised expenses and lowered returns to shareholders of more than 50 fund families.

Market timing is the use of quick trades to move money in and out of funds quickly, often taking advantage of different closing times for markets around the world. Most funds have policies forbidding it because heavy fund-share trading typically dilutes the profits of longer-term shareholders in the fund.

Authorities have alleged that Prudential's Boston-based brokers created fake accounts and changed account numbers to help mask the rapid trading by lucrative hedge-fund clients after certain mutual funds had blocked them or their customers from such trades.

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