Prudential builds fund to cover fraud claims

November 19, 1993|By New York Times News Service

NEW YORK -- Prudential Securities has seen its share of Wall Street's huge profits this year, with record pretax earnings for the first nine months of 1993. But for almost every penny earned, another has gone toward building reserves to cover the sizable liabilities from allegations of fraud in the 1980s.

Hardwick Simmons, the chief executive, said yesterday that the firm had already set aside $700 million to cover liabilities from sales of limited partnerships and that he expected those reserves to rise to at least $800 million by next year.

"We have essentially put a dollar of reserves aside for every dollar we have counted as earnings this year," he said. "We are continuing to put reserves aside now."

So far, $270 million has been paid out in settlements and legal fees from the reserves, which include $371 million that the firm agreed to pay last month to settle charges of federal securities law violations.

Mr. Simmons discussed Prudential's reserves and financial condition in a wide-ranging interview about the status of Prudential Securities as the firm and its employees face the aftermath of the huge settlement with the Securities and Exchange Commission. The settlement involved charges that the firm, then known as Prudential-Bache Securities, cheated investors for more than a decade, largely through fraudulent practices in the sale of limited partnerships.

In the interview, Mr. Simmons described how the firm was assembling a system involving dozens of people to receive, process, and analyze claims from many of the hundreds of thousands of investors who believe they were defrauded by the firm.

While Prudential hoped that the settlement would help put those problems behind it, Mr. Simmons said it had also created an extra burden for some employees. Some brokers, for example, are angered at having to explain to clients about charges involving activities that took place long before many of them worked there, Mr. Simmons said. Some longtime employees fear that their employment records will be tainted by fraud claims stemming from their use of misleading sales material provided by Prudential-Bache. Mr. Simmons said that the firm was negotiating with industry officials to ensure that the records of innocent brokers were not tarnished by such claims.

Despite the turmoil, Mr. Simmons, 53, said Prudential had seen little impact among clients from the bad publicity surrounding the SEC settlement. In October, the firm posted its second-highest monthly earnings, exceeded only by results in July.

"The most gratifying part of the whole thing has been how constant our clients have been," he said. "I think they really do believe the firm is a different firm today than it was at the times these actions took place."

Changes at the firm continue, particularly now as Prudential executives focus on assembling the claims process.

The firm, which expects to test the process by sending out the first claim forms within two weeks, has been discussing the process with other companies that have faced huge liability settlements, Mr. Simmons said. They include the Manville Corp., which established a huge trust fund for asbestos victims.

"This is a laborious process," he said. "There has never been anything like this claims process in our business. There are a lot of different pieces here."

In addition to composing a claim form, Prudential is creating a processing capability to send out and receive the claims and is training paralegals to examine the received claims.

Even though he is now spending much of his time cleaning up after his predecessor, George L. Ball, Mr. Simmons refused to comment on Mr. Ball's management.

But, Mr. Simmons said, Prudential has been moving aggressively away from focusing on building revenues and paying heavily for recruiting brokers from other firms, which were trademarks of the Ball years. Instead, Prudential is training its own brokers in the hopes of developing shared values.

"I feel very strongly that to build a culture here, we have got to train many more of out own, as opposed to recruiting," he said. Recruiting fromother firms, he added, "will never return to what it was in the 1980s." This year, Prudential trained 603 brokers and recruited 380. In 1991, it trained 90 brokers and recruited 450.

But those new brokers are now coming into the business explaining the misdeeds of their predecessors in the 1980s, he said. "Those trainees are calling out the name Prudential and are running into lots of questions they can't explain," he said.

For other brokers, there is a wide range of emotions. "There is a 'Why us?' feeling," said Mr. Simmons, who has been touring branches to take the pulse of brokers. "And there is a fear of the unknown about what will come out from this claims process."

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