Deferred Prosecution—Prudential Subsidiary

As we mentioned last week in connection with Frank Quattrone, deferred prosecution agreements are becoming increasingly common. Today, the US Department of Justice announced that Prudential Equity Group [hereinafter PEG], a “broker-dealer subsidiary of Prudential Financial [hereinafter Prudential]” has “entered into a deferred prosecution agreement in which PEG has admitted to criminal wrongdoing in connection with deceptive market timing trading in mutual fund shares dating back to 1999 and [has] agreed to a payment of $600 million in fines, restitution and penalties.”^[1] According to the agreement, $270 million will be paid into the SEC Fair Fund, a fund set up to compensate victims of the fraudulent conduct; the $300 million criminal penalty will be paid directly to the U.S. Treasury; $25 million is being paid to the USPIS Consumer Fraud Fund to assist in future fraud detection and deterrence efforts; and a $5 million civil penalty will be paid to the Secretary of the Commonwealth of Massachusetts.^[2]

This agreement contained a statement of facts laying out the activities which led to the extremely hefty penalties. According to this statement, “a number of brokers at PEG’s predecessor entity, Prudential Securities Inc. [hereinafter PSI], engaged in a scheme to defraud mutual funds and their shareholders by using deceptive practices to place thousands of prohibited market timing trades on behalf of the brokers’ clients, which were typically sophisticated hedge funds.”^[3] In so doing, the brokers generated commissions for themselves and “illicit profits” for their clients.^[4] PSI was aware of the brokers’ behavior, but senior management “failed to stop the activity.”^[5]

PEG must abide by a variety of terms and conditions for a period of five years, “including cooperation with the Justice Department in its ongoing investigation of abusive and fraudulent trading in mutual fund shares”; three individuals have already pleaded guilty for their roles in the fraudulent trading at PEG’s Boston office: Martin Druffer, Skifter Ajro, and Robert Shannon.^[6]

PEG’s parent company, Prudential, “has also entered into a separate compliance agreement.”^[7] Under the terms of that agreement, “Prudential will … cooperate with the Justice Department in its ongoing investigation,” and will maintain certain integrity policies, such as requiring Prudential’s General Counsel to “make periodic reports to the Prudential Board of Directors Audit Committee.”^[8]

While PEG’s fines are quite substantial, they are just part of a slew of lawsuits and investigations which were launched after the industry-wide practices came to light. To date, 15 companies have “reached settlements totaling more than $3.5 billion” and Bank of America agreed to a $675 million deal in 2004.^[9]

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[1] US DOJ, Prudential Financial Subsidiary Agrees to Pay $600 Million to Settle Securities Fraud Allegations, Aug. 28, 2006.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Michael J. Sniffen, Prudential to Pay $600M Over Allegations, AP (via Yahoo!), Aug. 28, 2006.