The SEC this week announced a settlement with Prudential Securities, Inc. and the filing of charges against its former registered representatives in connection with the market timing of mutual fund trades (Rel. Nos. LR-19813 , 34-54371, August 28, 2006). The settled action requires the payment of $270 million which will be distributed to harmed mutual funds and their shareholders.

Enforcement director Linda Chatman Thomsen said the actions were the latest in a sustained effort to address mutual fund abuse. The SEC’s investigation is continuing against other individuals involved in the matter.

The SEC’s order instituting administrative proceedings outlines a fraudulent market timing scheme involving at least 50 mutual funds beginning in late 1999 and continuing through mid 2003.

The fraudulent practices included the use of multiple broker identifying numbers and customer accounts to avoid notice by mutual funds. The sales reps also split trades into smaller trades to avoid detection. Certain mutual funds detected the market timing activity and attempted to block further trades. Thomsen noted that mutual fund companies sent more than a thousand letters and emails to Prudential complaining about the deceptive practices and asking that they be stopped.

The SEC’s order states that not only did Prudential fail to discipline or sanction any of the representatives for their market timing activities, it actually began to track their gross revenues. The representatives involved in the activity were top producers at the fi rm during the relevant period. Their rapid trading required additional staff to process the trades.

In agreeing to accept Prudential’s settlement offer, the SEC noted that the firm agreed to fully cooperate with any litigation or ongoing investigations and proceedings. Prudential will retain the services of an independent distribution consultant who will develop a distribution plan for the disgorgement of the $270 million. Prudential must also pay all costs and expenses associated with the distribution plan, including the compensation of a tax administrator and the payment of taxes.

The civil fraud action against four representatives alleges that they defrauded more than 25 mutual funds and their shareholders in thousands of market timing trades worth over $2.5 billion. The SEC is seeking injunctive relief, disgorgement, prejudgment interest, penalties and other equitable relief the court deems appropriate.

Prudential, now known as Prudential Equity Group, LLC, submitted letters to the SEC requesting waivers of the disqualification provisions of 1933 Act section 27A, 1934 Act section 21E and the exemption under Regulation E in connection with the settlement of the administrative proceeding. The safe harbor provisions of section 27A and section 21E are not available for any forward looking statements that are made with respect to the business or operations of an issuer that, during the three-year period preceding the date on which the statement was first made, has been the subject of an administrative decree or order arising out of a government action that: 1) prohibits further violations of the antifraud provisions of the federal securities laws; 2) requires that the issuer cease and desist from violating the antifraud provisions of the federal securities laws, or 3) determines that the issuer violated the antifraud provisions of the securities laws. The disqualifications may be waived to the extent otherwise provide by rule, regulation or an order of the Commission. The SEC granted the waiver.

Regulation E provides an exemption from registration under the 1933 Act for securities issued by certain small business investment companies and business development companies. The exemption is not available for the securities of an issuer if any investment adviser or underwriter for the securities to be offered is subject to an order of the Commission pursuant to 1934 Act section 15(b). The Commission may waive the disqualification for a showing of good cause. The SEC ordered the waiver of the disqualification provisions in response to Prudential’s letter.

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