Prudential plans to buy back misrepresented investments

September 15, 1994|By New York Times News Service

Prudential Securities Inc. plans to buy back more than $70 million worth of mortgage investments that were improperly sold to hundreds of retail investors as being less risky than they actually are, executives with the firm said yesterday.

The investments were sold during the spring and early summer, the executives said, and they are already showing large losses.

Although a final figure has not yet been tallied, Prudential believes that the customer losses on the investments total at least $10 million.

A mortgage trader for the firm has already been dismissed in the incident, said Charles Perkins, a Prudential spokesman. He declined to identify the trader.

The firm said the trader provided inaccurate data to Prudential's retail sales force in internal documents that understated the risk of the investments, known as collateralized mortgage obligations, or CMOs.

The brokers, in turn, unknowingly passed that false information on to the clients in selling the investments.

In the internal documents, the complex analysis of how the mortgage investments would perform in various interest-rate environments was apparently adjusted to minimize their true risk. The trader "was rejiggering the calculations," Mr. Perkins said.

Mr. Perkins declined to speculate on the trader's motivation. But other Prudential executives noted that decreasing the stated risks of the investments would result in higher sales.

The bonds will be repurchased at their original sales price.

The problem comes at a particularly difficult time for Prudential Securities. Last October, the firm settled charges with federal and state regulators that it fraudulently misrepresented the risk of more than $8 billion worth of limited partnerships in real estate, oil wells and other assets sold throughout the 1980s. The cost to the firm from that scandal, both in settlements and legal costs, is more than $1.1 billion.

A criminal investigation by the U.S. attorney in Manhattan has resulted from the partnership scandal.

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