Federal and Massachusetts authorities today filed fraud charges against seven former employees of Prudential Securities for improper trading of mutual funds, and securities regulators said the industry probe would look at the way that mutual funds price their shares.
Complaints from the US Securities and Exchange Commission and Massachusetts securities regulators said the five brokers and two managers, working at Prudential's Boston office, raked in millions of dollars with their superiors' support.
The alleged fraud was so rife that state authorities said the brokerage received 25,000 to 30,000 letters from clients in the past year warning Prudential about the improper trading.
Secretary of the Commonwealth William Galvin, the top securities regulator in Massachusetts, said Prudential executives openly encouraged market timing, which mutual funds discourage.
Lawyers for the accused denied any wrongdoing and said Prudential allowed market timing. The practice usually entails exploiting share price differences due to time zones.
The charges strike another blow to the $7 trillion industry, which manages the savings of 95 million Americans, and suggest that Prudential actively condoned misconduct. The charges are similar to those filed against Putnam Investments last week, but the misconduct at Prudential was much more widespread.
"This is on a much larger scale and this is not the conduct of a few rogue brokers but Prudential itself, who not only failed to detect but actively encouraged it," said Mr David Marder, a former SEC enforcement lawyer who is now a partner at Robins, Kaplan, Miller & Ciresi LLP in Boston.
The former employees, who worked at Prudential until September, became the latest defendants charged with securities fraud in a probe of the mutual fund industry that authorities signaled on Monday would expand to how funds are priced.
The SEC said the former brokers defrauded mutual funds and shareholders by concealing their identities and those of customers in thousands of market-timing trades from at least 2001 through September 2003.