Prudential 2006 Annual Report Download - page 180

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
Securities
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 current 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.” In December 2006, the United
States Court of Appeals for the Second Circuit vacated that decision. Plaintiffs have petitioned the Court of Appeals for rehearing
and rehearing en banc. 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., which alleges on behalf of issuers of securities in initial public offerings that the defendants
conspired to fix at 7% the discount that underwriting syndicates receive from issuers in violation of federal antitrust laws. Plaintiffs
moved for class certification in September 2004 and for partial summary judgment in November 2005. The summary judgment
motion has been deferred pending disposition of the class certification motion. In April 2006, the court denied class certification. In
August 2006, the United States Court of Appeals for the Second Circuit granted plaintiffs’ petition for review of that decision. In a
related action, captioned Gillet v. Goldman Sachs et al., plaintiffs allege substantially the same antitrust claims on behalf of
investors, though only injunctive relief is currently being sought.
Other Matters
Mutual Fund Market Timing Practices
In August 2006, Prudential Equity Group, LLC (“PEG”), a wholly owned subsidiary of the Company, reached a resolution of
the previously disclosed regulatory and criminal investigations into deceptive market related activities involving PEG’s former
Prudential Securities operations. The settlements relate to conduct that generally occurred between 1999 and 2003 involving certain
former Prudential Securities brokers in Boston and certain other branch offices in the U.S., their supervisors, and other members of
the Prudential Securities control structure with responsibilities that related to the market timing activities, including certain former
members of Prudential Securities senior management. The Prudential Securities operations were contributed to a joint venture with
Wachovia Corporation in July 2003, but PEG retained liability for the market timing related activities. In connection with the
resolution of the investigations, PEG entered into separate settlements with each of the United States Attorney for the District of
Massachusetts (“USAO”), the Secretary of the Commonwealth of Massachusetts, Securities Division, SEC, the National
Association of Securities Dealers, the New York Stock Exchange, the New Jersey Bureau of Securities and the New York Attorney
Generals Office. These settlements resolve the investigations by the above named authorities into these matters as to all Prudential
entities without further regulatory proceedings or filing of charges so long as the terms of the settlement are followed and provided,
in the case of the settlement agreement reached with the USAO, that the USAO has reserved the right to prosecute PEG if there is a
material breach by PEG of that agreement during its five year term and in certain other specified events. Under the terms of the
settlements, PEG paid $270 million into a Fair Fund administered by the SEC to compensate those harmed by the market timing
activities. In addition, $330 million was paid in fines and penalties. Pursuant to the settlements, PEG retained, at PEG’s ongoing
cost and expense, the services of an Independent Distribution Consultant acceptable to certain of the authorities to develop a
proposed distribution plan for the distribution of Fair Fund amounts according to a methodology developed in consultation with and
acceptable to certain of the authorities. In addition, as part of the settlements, PEG has agreed, among other things, to continue to
cooperate with the above named authorities in any litigation, ongoing investigations or other proceedings relating to or arising from
their investigations into these matters. In connection with the settlements, the Company has agreed with the USAO, among other
things, to cooperate with the USAO and to maintain and periodically report on the effectiveness of its compliance procedures. The
settlement documents include findings and admissions that may adversely affect existing litigation or cause additional litigation and
result in adverse publicity and other potentially adverse impacts to the Company’s businesses.
In addition to the regulatory proceedings described above that were settled in 2006, in October 2004, the Company and
Prudential Securities were named as defendants in several class actions brought on behalf of purchasers and holders of shares in a
number of mutual fund complexes. The actions are consolidated as part of a multi-district proceeding, In re: Mutual Fund
Investment Litigation, pending in the United States District Court for the District of Maryland. The complaints allege that the
purchasers and holders were harmed by dilution of the funds’ values and excessive fees, caused by market timing and late trading,
and seek unspecified damages. In August 2005, the Company was dismissed from several of the actions, without prejudice to
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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