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Prudential Financial arm agrees to record $600,000 fine

A unit of Prudential Financial has been fined $600,000 by the US Justice Department in connection with market timing trading in mutual fund shares, the largest fine yet for a market timing case.

A predecessor of Prudential’s broker-dealer subsidiary Prudential Equity Group, Prudential Securities, used deceptive practices to place thousands of market timing trades on behalf of clients, mostly hedge funds. The Justice Department claims that the brokers working for the unit used multiple accounts and identities to place trades, to make it appear that the trades were coming from many different sources, in an attempt to influence the market.

One group of brokers based at the company’s Boston branch office used at least 14 different FA numbers and 183 customer accounts for only seven clients which allowed the dealers to continue placing trades in funds that had taken steps to stop further trading. From 2001 to 2003, these brokers generated in excess of $50 million in commissions and in excess of $100 million in profits for the hedge fund clients.

According to the Justice Department, the brokerage was warned by the mutual fund companies about the scheme but took no steps to prevent further trading. Three individuals associated with the fraudulent trading at the Boston branch have pled guilty to wire and securities fraud charges. The penalty means that Prudential will not be criminally prosecuted, however.

Although market timing – buying and selling securities on the market quickly to profit from the short-term swings in prices – is not illegal, many mutual funds prohibit the practice because it harms long-term investors.

United States Attorney Michael Sullivan said: It is critically important for the public to have confidence in the integrity of our financial systems. The conduct at issue here was particularly troublesome, because it undermined the integrity and utility of the automated, standardized mutual fund trading system, a system that was created to bring greater efficiency to the trading of mutual funds.