Prudential Settlement Signals a Regulatory Shift on Wall Street
WALL Street is still feeling shock waves after Prudential Securities Inc.'s multimillion-dollar fraud settlement with federal and state securities regulators last week.
The agreement, which could cost the nation's fourth-largest investment house at least $371 million, could become the most significant case involving securities violations since the late 1980s, legal experts say. Prudential's purported misstep involved the sale of relatively speculative limited partnerships to private investors without adequately divulging the level of risk.
The United States Department of Justice is now the focus of attention within the financial community and could bring its own action against Prudential Securities. The state of Texas also withheld the right to make a claim by refusing to sign off on the settlement last week between Prudential, the Securities and Exchange Commission, and state securities' regulators. In addition, regulators are reportedly investigating former Prudential officials involved in the sale of the limited partnerships.
``To my knowledge, this settlement is absolutely unprecedented,'' says Joel Seligman, an expert on securities fraud and a law professor at the University of Michigan.
While Prudential is setting aside $330 million for allegedly defrauded individuals, the potential amount of claims ``could be far higher,'' Mr. Seligman says since Prudential has open-ended liability. Moreover, individual cases could drag on for years. The $371 million settlement is also the largest penalty ever imposed against a financial house in a fraud case dealing with individual investors, Seligman says.
THE settlement is not as large as the penalties and fines levied against the brokerage house of Drexel Burnham Lambert Inc., in the late 1980s - amounting to $650 million in 1989. In the early 1980s, Prudential, then Prudential-Bache, sold limited partnerships involving oil, gas, and real-estate holdings. Some investment dollars were reportedly diverted to other investors as ``payouts'' on earnings. Prudential, as part of its settlement, neither admits nor denies the allegations.
``This settlement does suggest that the securities laws will be vigorously enforced by the Clinton administration, perhaps far more so than was the case in the Reagan and Bush administrations,'' says Alan Bromberg, an expert on securities law at Southern Methodist University in Dallas.
There have been several scandals involving violations of securities laws since Drexel collapsed following the highly publicized junk-bond sales of the mid-1980s: Oversight of the ``penny stock market'' has been tightened, as investigators pursued a trail of deception and illegal trading in securities costing only a few dollars or less a share; Salomon Brothers Inc. suffered a momentary loss of face in 1991, as regulators zeroed in on a small group of dealers illegally benefiting from US government Treasury auctions; and federal and state regulators are currently investigating alleged misdealings by political officials and investment houses involving the municipal-bond market.
Still, the Prudential case is somewhat unique, says Professor Bromberg, in that a number of the cases of purported fraud involve problems with the economy itself: The collapse of the real estate, oil, and natural gas sectors, in such places as Texas in the 1980s, helped lead to losses involving limited partnerships. In that sense, he says, some regulators may be using ``securities law'' to help ``compensate'' losses to individual investors that stem as much from economic occurrences as from actual fraud.
Bromberg is among those securities experts now awaiting the reactions of securities regulators in Texas, including Denise Voight Crawford, the Texas securities commissioner. ``Texas has a zealously guarded reputation of being the toughest enforcer in the country for securities laws,'' Bromberg says.
In the past few years, Prudential Securities, a unit of the Prudential Insurance Company of America, has seen a change not just in its name, but in many of its top officers.