U.S. regulators settled a US$600 million case with Prudential Equity Group LLC over allegations that some of its reps engaged in mutual fund market timing.

The U.S, Securities and Exchange Commission announced settled enforcement proceedings against Prudential Equity Group, formerly known as Prudential Securities Inc., alleging that former PSI registered reps defrauded mutual funds by concealing their identities, and those of their customers, to evade mutual funds’ prospectus limitations on market timing.

PEG has been ordered to pay a total of US$600 million pursuant to a global civil and criminal settlement with the U.S. Attorney’s Office for the District of Massachusetts, the SEC, the Massachusetts Securities Division, NASD, the New Jersey Bureau of Securities, the New York Attorney General’s Office and the New York Stock Exchange.

Under the terms of the settlement, US$270 million will be paid to a distribution fund administered by the SEC for the benefit of those harmed by the fraud, US$325 million will be paid as a criminal penalty to the U.S. Department of Justice, and US$5 million will be paid as a civil penalty to the Massachusetts Securities Division.

In settling the commission’s charges, PEG has also agreed to be censured and to retain the services of an independent distribution consultant for the distribution of the US$270 million disgorgement. PEG consented to the issuance of the order without admitting or denying its findings.

In a related matter, the SEC also filed an unsettled civil injunctive action in the U.S. District Court for the Southern District of New York against several former PSI registered reps. These allegations have not been proven. It previously sued five former PSI registered reps and the former branch manager of PSI’s Boston branch office for similar conduct.

“Today’s action is the result of unprecedented cooperation among criminal and civil regulators in pursuit of a common goal: the protection of investors. Prudential’s US$270 million payment will help compensate the victims of this fraud, which harmed dozens of mutual funds and their shareholders,” said Linda Chatman Thomsen, director of the SEC’s Enforcement Division.

The commission’s order against PEG finds that from at least September 1999 through June 2003, former PSI reps deceived mutual funds in order to engage in market timing in the mutual funds’ shares. It finds that on numerous occasions when mutual funds tried to prevent or block the reps from market timing they used deceptive market timing practices to evade the mutual funds’ restrictions and continue to trade. These deceptive practices included the use of multiple FA numbers and multiple customer accounts, many of which bore fictitious names that had no relation to the actual customer’s name.

As early as 2000, PSI identified the registered reps and monitored their revenues and ranks within the firm. Although the firm received hundreds of notices from mutual fund companies that complained about the reps’ conduct, PSI failed to curtail their deceptive market timing practices, the SEC found.

As part of the global civil and criminal resolution, simultaneous with the SEC’s announcement of this action, the US Attorney’s Office for the District of Massachusetts announced that it had entered into an agreement with PEG concerning substantially the same conduct as identified in the SEC’s order. The SEC’s order also was filed contemporaneously with related, settled orders against PEG by the Massachusetts Securities Division, which brought civil charges against PSI in November 2003, the NASD, the New Jersey Bureau of Securities, the New York Attorney General’s Office, and the New York Stock Exchange.

“The scale of the fraudulent market timing activity that was allowed to occur through this firm and that went unchecked by the firm’s supervisory systems is unprecedented,” said NASD senior executive vice president Stephen Luparello. “The firm was aware that this activity was occurring and yet failed to take action to halt the conduct — except in its own proprietary mutual funds.”

“It is absolutely unacceptable to see the level of knowledge and acquiescence by senior managers of such pervasive deception by Prudential’s market-timing brokers,” said Susan Merrill, chief of enforcement, NYSE Regulation Inc. “The disgorgement of $270 million will compensate the funds’ shareholders. The action is also evidence of tremendous cooperation by securities regulators working together to ensure that a brokerage firm cannot profit from condoning fraud.”