Prudential admits fraud scheme

Prudential admits fraud scheme
By Stephanie Kirchgaessner inWashington and Rebecca Knight in,Boston
Copyright The Financial Times Limited 2006
Published: August 29 2006 03:00 | Last updated: August 29 2006 03:00


Prudential Financial, one of the largest US life insurers, has admitted that it engaged in a scheme to defraud mutual funds and their shareholders on behalf of hedge fund clients.

It also agreed to pay a $600m fine as part of a deferred prosecution agreement announced yesterday. The Justice Department said the fine marks the biggest settlement to date in the elaborate scandal first unveiled three years ago by New York attorney-general Eliot Spitzer.

That saw a number of companies in the mutual fund industry accused of abusing rules over the timing of market trades to generate profits for clients and hefty commissions for brokers.

The Justice Department said yesterday that senior managers at Prudential Securities - a former subsidiary of Prudential Equity Group now jointly owned with Wachovia - had repeatedly been made aware of the deceptive practices of some brokers, but had ignored the warnings and continued to issue the brokers with new client accounts.

The scheme, which dated back to 1999 and continued until 2003, generated $100m in profits for seven of the brokerage's clients and more than $50m in ill-gotten commissions, the DoJ said.

Three executives have pleaded guilty over their role and prosecutors said yesterday that their criminal investigation into the conduct of other individuals and entities was continuing.

Citing the ongoing probe, deputy attorney-general Paul McNulty declined to comment on whether the hedge fund clients who benefited from illicit trading knew of the scheme.

Prudential has taken charges to build up a reserve to pay for estimated settlement costs; according to analysts the $600m settlement approximates to the reserve the company created.

Stewart Johnson, an analyst at Friedman, Billings, Ramsey, the investment bank, said yesterday's announcement "lifted a cloud of uncertainty" that had dogged the company.

"The timing of the settlement was really the big unknown. I like Pru, but the [Justice Department probe] made earnings unpredictable.," he added.

Under the agreement, Prudential will pay $270m to the Securities and Exchange Commission, $300m to the US Treasury, $25m to the US Postal Inspection Service, which assisted in the probe, and a $5m civil penalty to the state of Massachusetts.

Prudential has also promised to assist in the DoJ's ongoing investigation, including an agreement to waive attorney-client privilege for documents related to the fraudulent behaviour.