Prudential 2005 Annual Report Download - page 162

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
General’s Office, the Massachusetts Office of the Attorney General, the Department of Labor, the United States Attorney for the
Southern District of California, the District Attorney of the County of San Diego, and various state insurance departments relating
to payments to insurance intermediaries and certain other practices that may be viewed as anti-competitive. The Company may
receive additional requests from these and other regulators and governmental authorities concerning these and related subjects. The
Company is cooperating with these inquiries and has had discussions with certain authorities, including the NYAG, in an effort to
resolve the inquiries into this matter. These matters are also the subject of litigation brought by private plaintiffs, including
purported class actions that have been consolidated in the multidistrict litigation in the United States District Court for the District
of New Jersey, In re Employee Benefit Insurance Brokerage Antitrust Litigation, and two shareholder derivative actions, Gillespie
v. Ryan and Kahn v. Agnew and the California Department of Banking and Insurance. Both derivative actions were dismissed
without prejudice. In Gillespie, the plaintiff entered into a tolling agreement with the Company to permit a Special Evaluation
Committee of the Board of Directors to investigate and evaluate his demand that the Company take action regarding these matters.
The Committee’s investigation is in progress.
In April 2005, the Company voluntarily commenced a review of the accounting for its reinsurance arrangements to confirm
that it complied with applicable accounting rules. This review included an inventory and examination of current and past
arrangements, including those relating to the Company’s wind down and divested businesses and discontinued operations.
Subsequent to commencing this voluntary review, the Company received a formal request from the Connecticut Attorney General
for information regarding its participation in reinsurance transactions generally and a formal request from the SEC for information
regarding certain reinsurance contracts entered into with a single counterparty since 1997 as well as specific contracts entered into
with that counterparty in the years 1997 through 2002 relating to the Company’s property and casualty insurance operations that
were sold in 2003. These examinations are ongoing and not yet complete and it is possible that the Company may receive additional
requests from regulators relating to reinsurance arrangements. The Company intends to cooperate with all such requests.
The Company’s subsidiary, American Skandia Life Assurance Corporation, is in discussions with various state insurance
departments concerning a remediation program to correct errors in the administration of approximately 11,000 annuity contracts
issued by that company. The owners of these contracts did not receive notification that the contracts were approaching or past their
designated annuitization date or default annuitization date (both dates referred to as the “contractual annuity date”) and the contracts
were not annuitized at their contractual annuity dates. Some of these contracts also were affected by data integrity errors resulting in
incorrect contractual annuity dates. The lack of notice and data integrity errors, as reflected on the annuities administrative system,
all occurred before the acquisition of the American Skandia entities by the Company. Certain state insurance departments have
requested modifications to the remediation program that the Company anticipates will impact the overall cost of the program. The
remediation and administrative costs of the remediation program would be subject to the indemnification provisions of the
acquisition agreement pursuant to which the Company purchased the American Skandia entities in May 2003 from Skandia.
Securities
In 1999, a class action lawsuit, Burns, et al. v. Prudential Securities, Inc., et al., was filed in the Marion County, Ohio Court of
Common Pleas against Jeffrey Pickett (a former Prudential Securities Incorporated Financial Advisor) and Prudential Securities
alleging that Pickett transferred, without authorization, his clients’ equity mutual funds into fixed income mutual funds in October
1998. The claims were based on theories of conversion, breach of contract, breach of fiduciary duty and negligent supervision. In
October 2002, the case was tried and the jury returned a verdict against Prudential Securities and Pickett for $11.7 million in
compensatory damages and against Prudential Securities for $250 million in punitive damages. In July 2003, the court denied
Prudential Securities’ motion to set aside or reduce the jury verdict and sustained the judgment in the amount of $269 million,
including prejudgment interest and attorneys fees. Prudential Securities’ appeal is pending.
Prudential Securities has been named as a defendant in a number of industry-wide purported class actions in the United States
District Court for the Southern District of New York relating to its former securities underwriting business. Plaintiffs in one
consolidated proceeding, captioned In re: Initial Public Offering Securities Litigation, allege, among other things, that the
underwriters engaged in a scheme involving tying agreements, undisclosed compensation arrangements and research analyst
conflicts to manipulate and inflate the prices of shares sold in initial public offerings in violation of the federal securities laws.
Certain issuers of these securities and their and former officers and directors have also been named as defendants. In October 2004,
the district court granted plaintiffs’ motion for class certification in six “focus cases.” The underwriter defendants appealed that
ruling to the United States Court of Appeals for the Second Circuit, which is scheduled to hear argument on it in March 2006. In
June 2004, plaintiffs entered into a settlement agreement with the issuers, officers and directors named as defendants in the lawsuits,
which the district court preliminarily approved in February 2005. In August 2000, Prudential Securities was named as a defendant,
along with other underwriters, in a purported class action, captioned CHS Electronics Inc. v. Credit Suisse First Boston Corp. et al.,
Prudential Financial 2005 Annual Report160