Off topic -- WSJ : Prudential ignored more than 25,000 warning letters (!)
[I did not read more than the first two paragraphs of this article.
It is amazing what a bunch of arrogant assholes work in the securities business !
Jon.]
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November 4, 2003
Prudential Ignored Warnings About Brokers
By MARK MAREMONT and JAMES BANDLER
Staff Reporters of THE WALL STREET JOURNAL
Prudential Securities Inc. received more than 25,000 warning letters in the past year from mutual-fund companies that its brokers were engaged in improper market-timing of mutual funds, but did nothing to curtail the problems at the root of the practice, Massachusetts regulators are expected to charge this week.
The allegations of laxity at Prudential Securities are expected to be included in civil securities-fraud charges that could be filed by Massachusetts regulators as soon as Tuesday against five former employees of Prudential's downtown Boston office. The Securities and Exchange Commission is expected to file similar charges.
Wachovia Corp., which controls Prudential Securities, declined to comment on the allegations in the draft complaint.
According to a draft copy of the Massachusetts complaint reviewed by The Wall Street Journal, regulators for the first time will name at least two hedge funds that were most active in conducting market-timing trades through Prudential's Boston branch, including Chronos Asset Management, which was funded by Canadian Imperial Bank of Commerce, and another fund referred to as Head Start. A person familiar with the matter said Head Start was an offshore fund whose beneficiaries regulators haven't determined. The complaint doesn't allege that the hedge funds did anything improper.
Though Prudential itself won't be charged in the complaint, Massachusetts regulators are expected to allege that the brokerage firm "knew of and had the ability to terminate" the market-timing activities of a group of three Boston brokers, but failed to do so. The three brokers evaded controls by operating under at least 62 different broker identification numbers, the complaint states, adding that Prudential did nothing to halt or discipline the Boston trio even after an explicit policy change early this year warning that market-timing wouldn't be tolerated and could be met with dismissal.
The complaint claims two branch managers at Prudential's Boston office allegedly condoned and even actively aided the practice of market-timing, partly because of huge commissions generated by the practice.
The probe of Prudential is just part of a mushrooming investigation by state and federal regulators into market-timing and other dubious practices in the mutual-fund industry. While not illegal, market-timing of mutual funds involves fast in-and-out trading that often hurts the profits of long-term shareholders. It is also improper for funds to permit some customers to engage in market-timing while denying that privilege to others.
According to the preliminary Massachusetts complaint, a group of three Boston brokers -- Martin J. Druffner, Justin F. Ficken and Skifter Ajro -- started actively soliciting market-timing customers as early as 1998, and by this year were generating a total of $3 million in commissions. Mr. Druffner, the group's head, was among the highest-producing Prudential brokers in the country, the complaint states. The customers generally were big hedge funds, including offshore funds.
The mutual funds being traded through the Prudential brokers generally weren't those run by Prudential itself, but those offered by other fund groups including Putnam Investments and Hartford Mutual Funds. Suspecting that the Prudential group was helping clients with market-timing, some of these funds repeatedly tried to cut off the Prudential brokers.
But the brokers continued to operate, the preliminary complaint states, by hiding their identities through a variety of subterfuges. They entered false ID numbers, used different branch identifier prefixes including those of North Miami and the West Indies, and used "unknown" as an identifier "to obscure their identity."
They also used other tricks to avoid detection, including executing trades under certain threshold amounts, such as $100,000 or $250,000, the complaint says. In many cases, the complaint says, the brokers were assisted by friendly mutual-fund wholesalers, who would tell them the threshold levels or advise which funds weren't being closely monitored.
According to the complaint, Prudential had plenty of warning about these events. In a June 2002 letter included in the complaint, a Hartford Mutual Funds employee complained that several Prudential representatives continued to trade after their privileges were terminated because their activities were "disruptive" to the funds.
The Hartford representative said the brokers continued to trade after being terminated using "different representative numbers, names, branches," and other ploys, and asked Prudential to "monitor and restrict" the brokers from future investments in Hartford funds. Messrs. Druffner and Fickner were among those listed by Hartford.
Another broker listed by Hartford as continuing to trade after being terminated was Frederick O'Meally, a former broker in Prudential's Garden City, N.Y., office. Mr. O'Meally is separately under scrutiny by the SEC and New York regulators for his involvement in market-timing of mutual funds by a senior trader at a big hedge fund, Millennium Partners LP. Mr. O'Meally was listed as investing under different names, including O'Neally.
Daniel M. Rabinovitz, a lawyer with Dwyer & Collora LLP in Boston who represents the brokers Messrs. Druffner, Ficken and Ajro, said his clients cooperated fully with the state and SEC probes.
Mr. Rabinovitz said the information his clients provided regulators showed that "at all times their business practices were proper, up front, known and approved by the mutual funds."
-- Carrick Mollenkamp contributed to this article.
Write to Mark Maremont at mark.maremont@wsj.com and James Bandler at james.bandler@wsj.com
Updated November 4, 2003
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