November 8, 2003
Brokers Say Prudential Approved Trading
By DAVID BARBOZA
OSTON, Nov. 7 - Before he resigned last month, Martin J. Druffner was considered a star stockbroker at the Boston office of what had once been called Prudential Securities.
He brought in millions of dollars in fees. He traded for big hedge funds and helped make the Boston office one of the top money producers in the nation for Prudential. Last June, a joint letter from Prudential's president and vice chairman praised him for his "superior achievement."
A lawyer for Mr. Druffner, 34, now says these achievements indicate that he was not a rogue employee and that his activities were approved of and rewarded at the highest levels of the company.
Federal and state officials charged him and six other former Prudential employees with securities fraud this week, accusing them of improper trading. But Mr. Druffner's lawyer, Daniel M. Rabinovitz, said his client worked with the knowledge of his superiors at Prudential to reduce losses as the unprofitable unit sought to merge with the brokerage unit of the Wachovia Corporation.
As part of their widening investigation into questionable trading activity at some of the nation's biggest mutual fund companies, regulators at the Securities and Exchange Commission and the Massachusetts Securities Division accused the former employees of engaging in a pattern of market timing, or quick in-and-out trades of mutual fund shares. They said that the trades put investors' money at risk and may have cost them hundreds of millions of dollars in trading fees over the last few years. The regulators here did not charge Prudential with any wrongdoing when they accused Mr. Druffner and the others this week. But William F. Galvin, who oversees the Massachusetts Securities Division, said on Friday that his office was still investigating Prudential and that he was trying to determine whether high-level executives there knew about or even sanctioned the questionable trades.
"The fact that Prudential was not charged doesn't mean Prudential won't be charged," Mr. Galvin said in a telephone interview. "That action doesn't mean we won't continue and other people aren't involved."
Lawyers for the seven former Prudential brokers and managers charged in Boston this week insist that they did nothing wrong.
"They did market timing with the complete blessing of higher-level executives," said Steven N. Fuller, a lawyer who represents Robert Shannon, one of the former Prudential employees. Mr. Fuller said his client "consulted directly with compliance, risk management and senior management of the firm to see whether they knew, understood and approved of the market timing."
Regulators, however, have released some internal Prudential documents that seem to suggest that Prudential tried to stop or curtail some of the market-timing activities, including what regulators say was illegal trading.
But lawyers for the Boston group said that some of those documents did not apply to what their clients were doing, and that Prudential's top officials gave them permission to override the instructions in those documents.
"My clients provided specific information - dates, times and places - regarding conversations occurring between them and top management at Prudential about their market-timing business practices," said Mr. Rabinovitz, who represents several other former Prudential workers in addition to Mr. Druffner.
Bob DeFillippo, a spokesman for Prudential Financial, declined to comment Friday on what high-level executives knew about the market-timing activity, saying only that the company was cooperating with investigators.
Tony Mattera, a spokesman for Wachovia, which merged its brokerage operations with those of Prudential last July, also declined to comment.
But the complaint by the Massachusetts Securities Division and other documents in the case suggest that senior Prudential officials in New York knew about the trading activity and even praised the Boston office for racking up huge profits.
"Senior Prudential executives knew and encouraged this activity and were reluctant to pass up the profits generated by courting multimillion-dollar accounts," the state said in its complaint.
The Massachusetts complaint even says that Michael J. Rice, the former president of Prudential and now a managing director at the company, approved of some of the market-timing activity, at a meeting in Virginia. Mr. Rice has not been charged with any wrongdoing. He declined to comment through a Prudential spokesman on Friday.
Lawyers for the Boston group say Mr. Rice was aware of their activity, and that the company's risk management and compliance offices were also aware of it.
Mr. Druffner told the regulators that when Mr. Rice learned that a new market-timing account would be worth $30 million, he approved its opening, according to Mr. Rabinovitz.
Indeed, Mr. Rabinovitz said, Prudential rewarded Mr. Druffner for his work, which in recent years primarily involved arranging market-timing trades for big hedge funds.
He was a member of the President's Council in 2002, a member of the Chairman's Council in 2003 and was sent congratulatory letters and even a plaque in June 2003 for his success. Regulators and lawyers involved in the case estimate he brought in $3 million to $5 million for the company in 2002 and part of 2003.
In a letter dated June 8, 2003, John R. Strangfeld, the vice chairman of Prudential, and Mr. Rice, then the president of the private-client group, thanked Mr. Druffner for his "extraordinary advice and counsel, and your continuing commitment to the firm."
A similar letter in February 2002 from Mr. Rice honored Mr. Druffner's "remarkable performance" and invited him and a guest to "experience the thrill and excitement of Las Vegas" as part of a company trip that coming September.
Gary C. Crossen, a lawyer who represents Michael Vanin, a former Prudential branch manager in Boston who was named in the state's complaint, said his client also got approval from senior executives and lawyers in New York.
"From Mr. Vanin's perspective, he got approval for this business at the highest levels of this company, including lawyers," he said.
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