Securities firm reaches deal to avoid indictment

October 13, 1994|By Bloomberg Business News

NEW YORK -- Prudential Securities Inc., which already has agreed to pay almost $700 million in fines and reimbursements to customers bilked in fraudulent limited partnership sales, has reached an agreement that avoids a criminal indictment in the scandal, people familiar with the discussions said yesterday.

The accord, first reported by the Wall Street Journal, may help the nation's fourth-largest securities firm avoid the fate of two other brokerage firms that were tainted after guilty pleas. Drexel Burnham Lambert Inc. pleaded guilty to six counts of mail and securities fraud in December 1988 and filed for bankruptcy in February 1990, and E. F. Hutton & Co. Inc., weakened after a guilty plea on 2,000 felony counts in a check-kiting scandal, was rescued in a buyout by Shearson Lehman Bros. Inc. in December "I think [Prudential] got lucky on this," said Philip Kodish, a broker in Prudential Securities' Akron, Ohio, branch who has worked at the firm and its predecessors for 35 years.

Even so, Prudential Securities is expected to remain a scar on the reputation of its parent, Prudential Insurance Co. of America. And prosecutors continue to probe former Prudential Securities executives who were responsible for limited partnership sales.

The scandal has cost Prudential Securities and its parent more than $1.1 billion so far, when legal fees and other costs are included. Newark, N.J.-based Prudential, the biggest life insurer in the country, acquired Prudential Securities for $381 million in 1981.

In April, credit rating company A. M. Best Co. lowered its financial-strength rating on Prudential Insurance for the first time in 83 years because of its exposure to lawsuits by limited-partnership and real estate fund investors. The rating was cut to "A+" (superior), Best's second-highest grade, from "A++" (superior).

Six months later, the adverse publicity from Prudential Securities' sales of fraudulent limited partnerships has had "some nonsignificant affect on sales" at the insurance company parent, said A. M. Best Senior Vice President Larry Mayewski. The publicity "certainly hasn't helped, there's no doubt been some missed opportunities, but it just isn't something we can gauge and assign a figure to," Mr. Mayewski said.

Prudential Securities agreed a year ago to an open-ended settlement with the Securities and Exchange Commission and state regulators who accused the firm of using fraudulent sales tactics when it sold more than $8 billion of limited partnerships in the 1980s. The firm initially set aside $371 million to pay investor claims and state penalties, but had to add $305 million to the restitution fund in July.

At the same time, a criminal investigation was being conducted by the U.S. attorney's office in Manhattan. After months of inquiry, however, prosecutors acceded to a "pretrial diversion" agreement to avoid a criminal indictment that could put thousands of employees out of work, hurt Prudential Insurance and damage public confidence in U.S. capital markets, said a lawyer who represents hundreds of investors with claims against the securities firm.

Under the agreement, Prudential Securities will be indicted only if it fails to comply with securities laws in the future, the lawyer said. Assistant U.S. Attorney Kenneth Vianale, the prosecutor handling the case, declined to comment yesterday.

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