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Prudential Accused of Fraud, Gets Chance to Avoid Trial

By Sharon Walsh and Jay Mathews
The Washington Post

Federal prosecutors, in an uncommon deal, Thursday charged the giant Prudential Securities Inc. with fraud in connection with the sale of limited partnerships to more than 100,000 investors in the 1980s, but agreed not to press the charges for three years.

If the firm lives up to an agreement with prosecutors filed in a federal court in New York at the same time, whose terms include paying $330 million into a special fund for investors and cooperating with other criminal investigations, the government will drop its charges.

It was the first time in more than a year of investigations and civil suits that the fourth-largest U.S. brokerage firm admitted criminal wrongdoing in its sales of risky limited partnerships.

Prudential admitted wrongdoing only for the sales of its energy partnerships, which represent a fraction of the limited partnerships that, according to federal regulators, were fraudulently sold.

The company's brokers made false statements about both the risks and the returns on $8 billion that had been invested in 700 different limited partnerships, according to a complaint filed last year by the Securities and Exchange Commission, which regulates brokerage firms. At that time, Prudential settled with the SEC and established a $330 million fund, which is running out.

Nearly 340,000 investors were allegedly swindled in the partnerships, including 13,000 in the Washington area.

The company is a subsidiary of the Prudential Insurance Co. of America, famous for its "piece of the rock" slogan. The insurance company added $305 million in cash to boost the securities firm's reserves last summer, but was not involved in the sale of the partnerships.

"We are very pleased that the government has decided to end its investigation and not take further legal action," said Hardwick Simmons, president and chief executive of Prudential Securities, who added that Prudential is "a dramatically different firm today."

"I suspect that, though (the government) is preserving the right to prosecute, this means no criminal prosecution of Prudential - ever," said John C. Coffee Jr., a law professor at Columbia University in New York.

Corporate prosecutions are a strange phenomenon to many legal experts, since a prosecutor can't put a company behind bars. But the effects of major securities fraud charges filed against a company can lead to its demise, as it did in the case against Drexel Burnham Lambert Inc. That securities firm filed for bankruptcy a little more than a year after it was charged with fraud by the SEC.

The Prudential settlement received both praise and criticism from securities experts.

Many of the investors who suffered losses in their Prudential accounts were retirees. They thought they were putting money into safe, income-producing limited partnerships. Most of the partnerships were in oil, natural gas and real estate, and many of them are now virtually worthless.

Lawyers for investors noted that the company has settled all civil litigation involving the energy partnerships, so it has agreed to acknowledge wrongdoing only in those partnerships for which it will have no further civil liability. It has not admitted wrongdoing in other partnership sales cases still in court, involving tens of thousands of investors.

"Prudential has not closed the book on this fiasco," said Joel H. Bernstein, who represents thousands of investors suing Prudential. "To do that, it has to step up to the plate and fully compensate investors for their losses."

At a press conference in New York, U.S. Attorney Mary Jo White rejected suggestions that the penalty was little more than an expensive traffic ticket. "I don't think other companies looking at this will say this was a lenient disposition of this case," she said. "I think they will be very concerned about it."

Washington lawyer Roger Spaeder agreed. "It's a very creative and aggressive approach," he said. "The government holds over Prudential's head a very large hammer. ... It should put the fear of God into management over the next three years."

White said the decision to enter into what is called a deferred prosecution agreement was based on the company's cooperation with the investigation, its acknowledgment of wrongdoing and concern that a full-scale indictment would have "crippling" consequences to thousands of innocent employees and investors. She also noted that the individuals believed to be responsible have left the company.

White's office still is investigating former Prudential employees who may be subject to criminal charges. She declined to comment further on those investigations.

White did not respond directly to suggestions that the deal was unfair to Prudential victims who already settled their claims at less than full value and would have no access to the additional payment announced today. "To get 100 percent is impossible in any scenario," she said.

The process of compensating investors continues, and the final cost to the company, which also paid the SEC a $41 million fine, will be far more than $330 million. Prudential said payouts, legal bills and reserves for civil lawsuits involving the partnerships total more than $1 billion.


Mathews reported from New York.