Prudential Securities, Inc. Ordered to Pay $270 Million in Restitution
NEWARK – Prudential Securities, Inc. has been ordered to cease and desist from violations of the New Jersey Uniform Securities Law and to pay $270 million in restitution as part of a joint civil settlement that included the New Jersey Bureau Securities, under the terms of a consent order announced today by Attorney General Zulima V. Farber, Consumer Affairs Acting Director Stephen B. Nolan and Bureau of Securities Chief Franklin L. Widmann.
The Bureau worked jointly on this civil matter with the Massachusetts Secretary of the Commonwealth, New York Attorney General, NASD, the New York Stock Exchange and the U.S. Securities and Exchange Commission, and in cooperation with the U.S. Department of Justice.
From September 1999 through June 2003, agents from various Prudential Securities offices allegedly engaged in a fraudulent scheme to conduct trading using multiple names and account numbers to avoid detection of excessively buying and trading shares by mutual fund companies. The agents also used “under the radar” trading, which refers to the dividing of one trade into numerous smaller ones to avoid detection by mutual funds.
The Bureau of Securities found that even after repeated notification of the agents’ deceptive conduct, Prudential Securities failed to supervise its agents or to establish and enforce necessary procedures to detect and/or prevent their deceptive trading practices. The agents altered their identification and customer account numbers to trick mutual fund companies into allowing them to continue trading in accounts that had exceeded the trading limit imposed by the mutual fund companies.
“These agents operated to evade the securities laws to the detriment of investors,” said Acting Director Nolan. “Their employer did nothing to stop them and, therefore, allowed agents to defraud investors and manipulate what should be a fair trading market.”
For example, agents of one office fabricated at least 13 financial advisor identification numbers and hundreds of customer accounts, when they actually only had five customers, to avoid being blocked from trading. Prudential Securities failed to prevent this deceptive conduct, thereby allowing the agents to continue to engage in the market timing of mutual funds.
Overall, Prudential Securities received hundreds of notices from mutual fund companies reporting the activities of the agents and asking Prudential to take action to stop their deceptive market practices.
“This case is a prime example of cooperation among regulators and most importantly, the $270 million in restitution will be paid to those who suffered losses through a plan of distribution administered by an independent distribution consultant,” Widmann said. “The Bureau is pleased that so much money will be returned to compensate victims of this misconduct.”
Prudential Securities will also cooperate with the Bureau in any investigation or litigation relating to the allegations of the consent order.
The investigation was conducted for New Jersey by Chief of Enforcement Richard Barry and Investigating Attorney Julian Leone of the Bureau of Securities.