Jan. 30–In the first criminal case brought in Boston in the mutual fund trading scandal, US Attorney Michael J. Sullivan has told a former Prudential Securities broker that he plans to bringcriminal charges against him for his role in an alleged market-timing scheme that generated millions in commissions.
Justin F. Ficken, a former broker from Boston, received the so-called target letter, which alleges he engaged in mail fraud, wire fraud, and violations of the antifraud provisions in federal securities laws in his role as a broker at Prudential Securities’ Boston branch, said his attorney, Willis Riccio of Adler, Pollock & Sheehan PC.
“I believe in Mr. Ficken’s innocence, and we’re going to defend him vigorously,” Riccio said. “Mr. Ficken is just a victim in a bizarre and widespread publicity inquisition.”
The target letter represents a significant threshold in the investigation and prosecution of the Prudential office and the larger mutual-fund trading scandals. The Massachusetts Division of Securities and the US Securities and Exchange Commission in November both filed civil charges against groups of Prudential employees, including Ficken, claiming they violated securities laws by enabling hedge funds to profit by engaging in rapid trades into and out of mutual funds, a practice known as market timing.
Those cases are continuing. But the target letter indicates that Sullivan’s office, which convened a grand jury to investigate the matter last fall, is planning to pursue criminal charges against Ficken and possibly others. In December, a former senior executive of Fred Alger Management Inc. became the first person prosecuted in the current wave of mutual fund investigations to receive a jail sentence.
“The stakes have moved quickly from paying money to risk of being thrown out of the industry to exposure to jail time for those accused,” said Jacob S. Frenkel, a securities attorney at Smith Gambrell & Russell LLP of Washington and a former SEC enforcement attorney.
“Most likely, this isn’t an isolated incident. We’re likely to see more of this. There are a lot of issues that have never before been on the plates of the state and federal prosecutors. As they each develop an understanding of the issues in play, we’re seeing a new cadre of regulators executing their enforcement roles.”
A target letter, according to lawyers familiar with Justice Department cases, is a warning that the recipient is likely to face criminal charges. “It means, ‘We’re coming after you,'” Frenkel said.
Market timing isn’t illegal, but many fund companies prohibit such trades because it skims profits from the funds and drives up costs for long-term investors.
In its civil complaint, the SEC charged Ficken and five others at Prudential with defrauding dozens of mutual funds, and their shareholders, through numerous market-timed trades. Though the funds prohibited such rapid, in-and-out trades, a group at Prudential helped clients to make the trades even after their clients were identified as troublesome market timers, the complaint said.
Brokers placing trades are identified by numbers. Ficken and others in the trading group allegedly evaded detection by employing multiple ID numbers and using multiple accounts for customers using different names.
The SEC claimed the group of brokers made nearly $5 million in gross commission in 2002 alone. Ficken received 20 percent of those commissions, according to the state’s complaint.
Earlier this month, Ficken’s attorneys filed a memo seeking to have the SEC’s charges dismissed. Specifically, Riccio and attorney Brad B. Bailey argue that the commission didn’t provide evidence that the market-timing trades drove up costs or otherwise hurt shareholders in the mutual funds being traded.
Moreover, they note that the SEC itself says market timing isn’t illegal, and argue that the commission doesn’t prove Ficken sought to mislead the fund companies.
“Mr. Ficken’s participation in a legal activity is not sufficient to establish an intent to deceive,” the lawyers argue. “There is no support for claiming that Mr. Ficken’s activities were either reckless or deceitful.”
Ficken’s lawyers declined to make their client available. Riccio said Ficken’s activities were not only known to superiors, they were actively encouraged.
“Ficken and his associates indulged in market timing with the knowledge and approval of their superiors,” he said. “You don’t get a different account number on your own.”
–By Jeffrey Krasner and Andrew Caffrey
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