Prudential 2007 Annual Report Download - page 185

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
21. COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND
REGULATORY MATTERS (continued)
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 repleading the state claims, but remains a defendant in other
actions in the consolidated proceeding. In July 2006, in one of the consolidated mutual fund actions, Saunders v. Putnam American
Government Income Fund, et al., the United States District Court for the District of Maryland granted plaintiffs leave to refile their federal
securities law claims against Prudential Securities. In August 2006, the second amended complaint was filed alleging federal securities law
claims on behalf of a purported nationwide class of mutual fund investors seeking compensatory and punitive damages in unspecified
amounts. Discovery is ongoing. Motions to dismiss the other actions are pending.
Commencing in 2003, the Company received formal requests for information from the SEC and NYAG relating to market timing in
variable annuities by certain American Skandia entities. In connection with these investigations, with the approval of Skandia Insurance
Company Ltd. (publ) (“Skandia”), an offer was made by American Skandia to the authorities investigating its companies, the SEC and
NYAG, to settle these matters by paying restitution and a civil penalty of $95 million in the aggregate. While not assured, the Company
believes these discussions are likely to lead to settlements with these authorities. Any regulatory settlement involving an American Skandia
entity 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. If achieved, settlement of the matters relating to American Skandia also could
involve continuing monitoring, changes to and/or supervision of business practices, findings that may adversely affect existing or cause
additional litigation, adverse publicity and other adverse impacts to the Company’s businesses.
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