Prudential Brokers Used Aliases,Insiders' Tips, Complaint Says

2003-11-05 08:38 (New York)

Nov. 5 (Bloomberg) -- PrudentialSecurities Inc. brokers

Martin J. Druffner, Marty Drussner, MartinDruffner and Martin

Druffener all made mutual fund tradesat the firm's Boston branch

during the past five years.

They were all the same person: Martin J.Druffner. Yesterday,

Massachusetts regulators chargedDruffner, a former Prudential

broker, and two of his colleagues withsecurities fraud for

creating 62 identities that enabledthem to make short-term trades

in mutual funds while evading fundcompany restrictions.

The complaints provide the most detailedpicture yet of how

brokers and investors allegedly wereable to evade fund companies'

limits on frequent trading to makeprofits at the expense of long-

term shareholders. Across the industry,improper short-term trading

may have skimmed more than $4 billion ayear from investors,

according to New York Attorney GeneralEliot Spitzer.

``This has been open and notorious foryears and there should

be penalties reaching up into thebillions of dollars,'' said

Mercer Bullard, a University ofMississippi law professor and

founder of shareholder advocacy groupFund Democracy, in a radio

interview with Bloomberg News.

Druffner, 34, started at Prudential in1996 and began making

short-term fund trades on behalf ofhedge fund clients in 1998,

according to a complaint from MassachusettsSecretary of the

Commonwealth William Galvin, thestate's securities regulator. He

and co-workers Justin Ficken, 28, andSkifter Ajro, 34, who also

were charged, resigned from Prudentialat the end of September.

`Acted Appropriately'

Druffner and the other brokers ``trulybelieve that at all

times they acted appropriately and thateverything they did was

known to their employers' uppermanagement,'' said their lawyer

Daniel Rabinovitz at Dwyer &Collara in Boston. The allegations

will be contested, he said.

Executives at companies including PutnamInvestments and Fred

Alger Asset Management Inc. have beencharged with improper fund

trading. Other companies such asAlliance Capital Management

Holding LP remain under investigation.The scandal has led to the

ouster of Putnam's Lawrence Lasser, wholed the fifth-biggest U.S.

mutual fund company for the past 18years.

Richard Strong, the founder of StrongCapital Management Inc.,

stepped down as chairman of his mutualfunds group on Sunday after

Spitzer's office said it may filecharges against him for allegedly

profiting from mutual fund trading forhis own account.

Now, U.S. lawmakers are planning new rulesto tighten

oversight of a $7.1 trillion industrythat's responsible for the

savings of about 95 million Americans.``It's time for a wholesale

re-examination of how mutual funds areorganized and managed,''

said Senator Peter Fitzgerald, anIllinois Republican, on Monday.

MarketTiming

Prudential, now part of WachoviaSecurities, hasn't been

accused of wrongdoing. The companyremains under investigation.

Earlier today, the Wall Street Journalreported that the

National Association of Securities Dealersis examining whether

Prudential's Boston brokers engaged inafter-hours trading of

mutual fund shares, which is illegal.

Bob DeFillippo, a spokesman for PrudentialFinancial Inc., the

owner of Prudential Securities untilJuly, declined to comment on

the charges. The company, based inNewark, New Jersey, is

cooperating with all inquiries, hesaid.

Most fund companies employ monitors towatch trading activity

and shut out short-term traders, whocan increase fund transaction

costs and erode profits from long-termholders. Many funds say in

their prospectuses that they discouragethe practice because when

shares are sold it reduces the overallvalue of a fund.

Trades placed by the Prudential brokerssought to profit when

market moves weren't immediatelyreflected in the value of fund

shares, according to the complaint.Mutual funds are priced once a

day at 4 p.m. New York time even thoughthe securities they own may

trade constantly around the world.Investors aren't allowed to

place fund orders after 4 p.m. and getthat day's price.

Eluding Monitors

The brokers ducked monitors by breaking upbig trades into

small amounts that would draw lessscrutiny, using bogus trading

identification numbers and gettingcooperation from insiders at

fund companies, according to thecomplaint.

In one case, after a fund company put a Prudential broker's

identification number on a restricted list, a salesperson at the

undisclosed company told the broker to ``just get another rep

number,'' the complaint said. In another, a salesperson e-mailed a

list of funds that could be frequently traded even though

prospectuses of the listed funds said such trades weren't allowed.

Other times, the brokers had more explicit arrangements. In

one instance, the head of a fund company's ``market-timing police''

agreed to let rejected trades be resubmitted the following day at

the previous day's price.

Another fund company allowed the brokers to place $6 million

in five accounts for frequent trading as long as the brokers

``never hit the same manager per account in a 30-day period.''

Fund Companies

The complaints on Tuesday didn't identify any of 12

salespeople who gave the brokers advice or the eight companies

where the brokers got agreements permitting frequent trading.

Massachusetts regulators said last month that they had

subpoenaed a salesperson at Fidelity Investments, the biggest U.S.

fund company, and one at Morgan Stanley as well as a former

employee of Franklin Resources Inc. as part of the Prudential

broker investigation.

At the time, Fidelity and Franklin acknowledged the subpoenas

without further comment. Morgan Stanley said the company would take

disciplinary action for any violations of its policies against

frequent trading.

--Aaron Pressman in the Boston newsroom at (1) (617) 338-5822 or

apressman@Bloomberg.net, with reporting by Eddie Baeb in Boston,

Helen Stock in New York and Michael Schneider and Otis Bilodeau in

Washington. Editors: Kellermann, Quinson.