An inquiry into multiple scandals in the American mutual funds industry turned its attention to Prudential Securities yesterday.
The rapidly evolving investigation of the once pristine industry stepped up a gear as federal regulators filed civil charges against six former workers with its Boston branch for alleged improper trading.
The action came as hearings continued on Capitol Hill into cascading revelations of controversial dealings in the $7tn mutual fund sector, which has traditionally been a safe haven for small investors. Roughly half of all American households have some savings with mutual funds.
On Monday, Lawrence Lasser, the head of Putnam Investments, the fifth largest mutual fund company in the United States, resigned his post just days after federal and state regulators sued the firm and two of its portfolio managers for fraud.
Charges against five former brokers and one branch manager at Prudential were filed by the Securities and Exchange Commission and Massachusetts regulators yesterday. They accused the six of engaging in improper market-timing trades, which involves fast in-and-out trades in funds.
They allegedly sought to conceal their activities by using multiple broker identification numbers. The complaints said Prudential knew of the trades and did nothing to stop them.
"By concealing or misrepresenting their own identities or the identities of their clients, the defendants were able to circumvent restrictions intended to protect mutual fund shareholders against excessive market timing," said SEC Enforcement chief Stephen Cutler. "That's fraud, plain and simple."
Putnam Investments, controlled by Marsh & McLellan, is also Boston-based.
Monday saw the resignation of the head of the regional office of the SEC following criticism that he failed to respond to tip-offs of problems at the firm. These allegedly involved the failure by Putnam to reveal a series of personal trades by some of its own managers in several of its own funds.
Pension fund managers for New York City said last night that they were pulling about $725m of holdings out of Putnam in response to the scandal, following the suit of several other major public pensions. Putnam is also being accused of allowing managers to practise market-timing trades.
Market-timing itself is not technically illegal, but is certainly discouraged as it lowers the profits of long-term investors.
In a separate scandal last night, federal prosecutors filed 85 different criminal charges against the former head of HealthSouth, Richard Scrushy, in a case in which 15 former executives of the company have already pleaded guilty to fraud. Lawyers for Mr Scrushy said he would plead innocent.
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