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Prudential to Pay $600 Million for Market Timing

Company Defrauded Investors In At Least 50 Mutual Funds

August 29, 2006

Mutual Fund Market Timing • Prudential to Pay $600 Million for Market Timing • Waddell & Reed Settles Market Timing Case • Court Overturns Key Mutual Fund Investor Protection • SEC Missed Mutual Fund Abuses, GAO Finds • Mutual Fund Firms Fined $21 Million • Merrill Lynch to Pay $10 Million • Kaplan Brokers Plead Guilty to Late Trading • PBHG Agrees to Refund $120 Million • Fremont Investment Advisors Settles • INVESCO Settles Market Timing Charges with Colorado • Spitzer Spoils Bank of America's Party

The Prudential Equity Group has reached multi-million dollar agreements that resolve an investigation of market timing.

Under the agreement, the financial services firm will pay $270 million in restitution to injured investors. Under a separate agreement with the U.S. Department of Justice, Prudential will pay a penalty of $330 million. The agreements also require the company to undertake a series of reforms.

"We are pleased that Prudential has joined the long list of institutions that have agreed to compensate customers harmed by market timing activity and implement sweeping reforms," New York Attorney General Eliot Spitzer said.

The investigation of Prudential began with a subpoena from the New York Attorney General's Office in August 2003.

The investigation -- conducted in cooperation with the Securities and Exchange Commission, New York Stock Exchange, National Association of Securities Dealers and the states of Massachusetts and New Jersey -- revealed that the company's brokers defrauded at least 50 mutual funds and their investors between September 1999 and June 2003.

Specifically, the brokers provided hedge fund operators and other favored investors with phony customer account numbers that were used to conduct repeated in and out trading of various funds. The scheme helped the favored investors evade the scrutiny of the "timing police" at the mutual fund companies.

Senior managers at Prudential were aware of the fraud. In April 2002, the manager of Prudential's Mutual Fund Operations Division shared with other senior Prudential managers the following e-mail from another mutual fund family, which complained about Prudential's brokers:

"What we have seen scares us. It appears certain representatives are changing account registrations, tax id numbers, and branch and rep [ID] numbers in an effort to time the [mutual fund family's] funds. All of these accounts have been stopped, but each day "new" ones pop up."

In February 2003 the president of Prudential's Private Client Group received a copy of an e-mail from the manager of Prudential's branch office in Garden City expressing concern about the tactics used by Prudential's top-producing broker to enable a customer to continue market timing at another mutual fund company:

"Fund companies have been misled as to the identity of the [brokers] of record... Recently, [a mutual fund company] was provided with information which was at best misleading to effect the removal [of] a block [from further market timing]."

Between 1999 and 2003, Prudential received more than a thousand letters and e-mails from mutual funds complaining of market timing by Prudential brokers. However, the company did not act to halt the activity, which harmed small investors who typically buy and hold their mutual fund shares.

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