BOSTON (AP) – The Massachusetts secretary of state charged Prudential Securities on Thursday with widespread late trading of mutual funds for its hedge fund customers.
Secretary of State William F. Galvin said the scheme violated state and federal laws and hurt smaller investors in the funds.
Galvin said brokers in Prudential’s Boston office allowed more than 1,100 late trading transactions in the past 21/2 years with a total value of more than $162 million. The administrative complaint seeks restitution and an unspecified fine.
Late trading allows a favored investor to take advantage of any events after the market closes that are not reflected in the fund’s closing price. Regular investors at that hour would have had to chance the next day’s closing price, since mutual funds are priced only once per day.
“This is yet another example of Wall Street putting the interests of favored clients ahead of retail investors,” Galvin said in a statement. “It’s a dismaying but by now a familiar pattern.”
Bob DeFillippo, a spokesman for Prudential Financial Inc., said Prudential officials hadn’t seen the complaint or evidence supporting it and would need time to review it.
“We continue to cooperate fully with all regulatory inquiries,” he said
Charlotte, N.C.-based Wachovia Corp. acquired Prudential Securities in July and the firm is now known as Wachovia Securities LLC, based in Richmond, Va. Prudential Financial retains a minority stake in the company, and responsibility for all activities before the acquisition, DeFillippo said.
He said Prudential was working with Wachovia to review the trading practices of former Prudential Securities brokers in Boston, but those reviews were not yet complete.
The charges against Prudential were the latest in a widening scandal that hit the mutual fund industry this fall, raising questions about whether smaller investors are being cheated as they put their money into what has traditionally been considered a safe investment.
DeFillippo said the allegations didn’t involve Prudential’s own mutual funds, but Prudential brokers who were buying other mutual funds.
Galvin last month charged five former Prudential brokers with fraud in a related mutual fund market timing scheme. Charges against the company had been expected to follow.
The administrative complaint seeks restitution and an unspecified fine. Brian McNiff, a spokesman for Galvin, said it wasn’t clear how much impact those trades had on other investors.
Galvin said that late orders were executed even though it was a violation of company policy.
“This scheme was clearly a violation of Prudential’s internal controls,” he said. “Many people knew this was going on and no one stopped it.”
In July, Prudential Securities paid $382,000 to settle charges by the Securities and Exchange Commission that it had inadequate systems to monitor policies on sales of different classes of mutual funds from 1998 to 2000.
