Document:

Letter of Acceptance, Waiver and Consent

 Exhibit 10.4 
 NASD 
 LETTER OF ACCEPTANCE, WAIVER AND CONSENT 
 NO. E112003067901 
  

			
	TO:	  	Department of Enforcement
		  	NASD
		
	RE:	  	 Prudential Securities, Incorporated, n/k/a Prudential Equity Group, LLC,
 Respondent

		  	BD No. 7471

 Pursuant to Rule 9216 of NASD Code of Procedure, we submit this Letter of Acceptance, Waiver and Consent
(“AWC”) for the purpose of proposing a settlement of the alleged rule violations described in Part II below. This AWC is submitted on the condition that, if accepted, NASD will not bring any future actions against us alleging violations
based on the same factual findings. 
 We understand that: 
  

	 	1.	Submission of this AWC is voluntary and will not resolve this matter unless and until it has been reviewed and accepted by NASD’s Department of Enforcement and National
Adjudicatory Council (“NAC”) Review Subcommittee or Office of Disciplinary Affairs (“ODA”), pursuant to NASD Rule 9216; 

  

	 	2.	If this AWC is not accepted, its submission will not be used as evidence to prove any of the allegations against us; and 

  

	 	3.	If accepted: 

  

	 	a.	this AWC will become part of our permanent disciplinary record and may be considered in any future actions brought by NASD or any other regulator against us;

  

	 	b.	this AWC will be made available through NASD’s public disclosure program in response to public inquiries about our disciplinary record; 

  

	 	c.	NASD may make a public announcement concerning this agreement and the subject matter thereof in accordance with NASD Rule 8310 and IM-8310-2; and 

  

	 	d.	We may not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any finding in this AWC
or create the impression that the AWC is without factual basis. Nothing in this provision affects our testimonial obligations or right to take legal or factual positions in litigation or other legal proceedings in which NASD is not a party.

 We also understand that our experience in the securities industry and disciplinary history may be factors that will be
considered in deciding whether to accept this AWC. That experience and history are as follows: 
 Prudential Securities, Incorporated
(“PSI”), n/k/a Prudential Equity Group, LLC (“PEG”) (BD No. 7471), is a registered broker/dealer under the Securities Exchange Act of 1934 (the “Exchange Act”) and has been a member of this Association since
November 2, 1939. PEG is wholly owned by Prudential Financial, Inc. (“Prudential Financial”). Prudential Financial is a publicly-owned holding company, traded on the New York Stock Exchange, whose operating subsidiaries provide a wide
range of insurance, investment management and other financial products and services to retail and institutional customers including insurance brokers and investment managers. From at least 1998 through July 2003, PSI engaged in retail securities
brokerage operations and maintained branch offices in Boston, Massachusetts and elsewhere. On July 1, 2003, Prudential Financial caused PSI to transfer the assets relating to its domestic retail securities brokerage operations to a holding
company controlled by an unaffiliated entity. Following this asset transfer, PSI converted from a stock corporation into a limited liability company and was renamed PEG. PEG provides equity research, sales and trading to domestic and international
institutional customers.1 PSI has a prior NASD disciplinary history, including several NASD actions alleging
supervisory deficiencies. 
 I. 
 WAIVER OF PROCEDURAL RIGHTS 
 We specifically and voluntarily waive the following rights granted under NASD’s Code of Procedure:

  

	 	A.	To have a Formal Complaint issued specifying the allegations against us; 

  

	 	B.	To be notified of the Formal Complaint and have the opportunity to answer the allegations in writing; 

  

	 	C.	To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made and to have a written decision issued; and

  

	 	D.	To appeal any such decision to the NAC and then to the U.S. Securities and Exchange Commission and a U.S. Court of Appeals. 

 Further, we specifically and voluntarily waive any right to claim bias or prejudgment of the General Counsel, the NAC, or any member of the NAC, in connection with such

  

	1	PEG’s principal place of business is in New York, New York. PEG does not have any retail operations and does not sell mutual funds. 

  

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 person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other
consideration of this AWC, including acceptance or rejection of this AWC. 
 We further specifically and voluntarily waive any right to claim that a person
violated the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other
consideration of this AWC, including its acceptance or rejection. 
 II. 
 ACCEPTANCE AND CONSENT 
  

	 	A.	We hereby accept and consent, without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of NASD, or
to which NASD is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by NASD: 

 Summary 
 From at least January 1, 2001 to July 1, 2003 (the “relevant
period”), certain of PSI’s registered representatives engaged in deceptive activities in order to make improper market timing transactions in mutual funds on behalf of their clients. The registered representatives used multiple customer
account numbers and/or representative numbers (also referred to as “FA numbers” at PSI) to evade the trading restrictions (“blocks”) that certain mutual funds imposed on market timing transactions. For example, following the
imposition of a block, the representatives just placed the market timing trades in another account or, if an FA number had been restricted, the representatives placed trades using another FA number. PSI failed to prevent this activity. As a result,
representatives defrauded mutual funds and their shareholders by misrepresenting their identities (through the use of multiple FA numbers) and the identities of their brokerage clients (through the use of multiple customer account numbers) to engage
in market timing after the mutual funds had placed blocks attempting to prohibit such trading. 
 As a result of the violative conduct, at
least 1,600 PSI customer accounts were collectively able to purchase and sell mutual fund shares worth more than $116 billion, earning those clients more than $162 million in net profits. Those market timing transactions also earned PSI nearly $50
million in gross commissions. 
 During the relevant period, PSI failed to maintain accurate books and records related to mutual fund
transactions. Certain PSI representatives, despite time being material to the transaction, routinely failed to document the time the customer order was received. For example, there was an absence of time stamps on numerous order tickets in the
Boston branch office, making it difficult to determine whether the order was received before the 4:00 p.m. market close on the trade date. As a result, PSI would not have been able to prevent and detect any late trading in mutual fund shares.
Indeed, the volume of market timing business in the Boston branch office created significant risk of late trading. Mutual fund orders were often transmitted to PSI’s Mutual Fund Operations department after 4:00 p.m. for processing. 

 

 3 

 Since at least 1998, PSI was aware that its Boston and three of its New York branch offices, among
others, had representatives that primarily engaged in market timing transactions. Indeed, beginning in 2002, the firm’s Risk Management Department had numerous meetings on the activities of those registered representatives. PSI, however, failed
to have an adequate supervisory system and written supervisory procedures relating to market timing activities, mutual fund exchanges, and detecting and preventing any late trading of mutual fund shares. 
 Background 
 During the
relevant period, PSI maintained branch office locations throughout the United States. Some of those branch office locations, including those located in Boston, Massachusetts, Garden City, New York, and New York, New York, maintained relationships
with certain clients, including hedge funds, which engaged in “market timing” of mutual funds. Market timing is essentially the frequent trading of mutual fund shares in order to take advantage of pricing inefficiencies or market
movements. Market timing can dilute the value of shares and raise fund transaction costs. 
 During the relevant period, PSI generally
processed hundreds of separate mutual fund transactions weekly for its market timing hedge fund clients. In many instances, the hedge fund clients sent facsimiles to the PSI representative in the morning, which identified hundreds of potential
mutual fund trades that the hedge fund clients might want to transact on that day or in the days ahead. Thereafter, typically in the late afternoon, the hedge fund clients would contact the PSI representatives to execute some or all of the trades on
the list. The PSI registered representatives would then, often frantically, attempt to enter the trades into PSI’s order entry system before the system shut down at the close of the market at 4:00 p.m. Given the number of trades requested by
the hedge fund clients, the representatives were often not able to enter all those trades before the close. In that event, the representatives would often fax the remaining orders to PSI’s mutual funds operations desk in New York to process the
trade as of that day. 
 Many mutual funds maintain policies and procedures to detect and prevent market timing transactions. Typically,
these policies include prohibiting future transactions after a customer has already placed a certain number of trades. To enforce these limits, the funds and/or their distributors track activity by customer account number and/or FA number. Once a
customer reaches the limit, the mutual funds and/or their distributors typically send “block letters” to the brokerage firm, indicating that the mutual fund company will no longer accept exchange transactions from that customer and/or the
representative. For example, a block letter received by PSI during the relevant period noted that: 
 [T]he heightened level of exchange
activity in the accounts raises concerns for the funds involved ... [i]n light of the amount of recent exchange activity and the funds’ concerns, no more exchanges will be allowed on these accounts. Should future exchange requests be
submitted, [mutual fund distributor] will not accept them. 
  

 4 

 During the relevant period, PSI received thousands of communications from various mutual fund companies
continually placing blocks on a limited number of representatives and their clients. As further detailed below, those PSI registered representatives engaged in a relatively straightforward scheme to evade the restrictions and continue the market
timing activity. 
 Fraudulent Activities Relating to Mutual Fund Market Timing 
 During the relevant period, PSI knew, or was reckless in not knowing, that certain of its representatives were engaged in deceptive and manipulative
practices in order to continue to make market timing trades for their clients. The firm, however, failed to prevent this misconduct. Those representatives, among other things, obtained successive customer account numbers and multiple FA numbers from
PSI in order to evade or circumvent block letter restrictions and otherwise exceed the mutual fund exchange limits. If restrictions were imposed on one account, the representatives would continue market timing by transferring customer funds and
placing the prohibited trades in another account. While the use of multiple accounts and FA numbers are not per se improper, these techniques were abused at PSI. For example, one group of three representatives in PSI’s Boston branch
office used 183 accounts for just seven different hedge fund clients engaged in market timing. 
 The Boston branch representatives also
obtained multiple FA numbers in order to continue the market timing strategy. If a mutual fund imposed a block on a representative, the representatives would continue market timing by placing the prohibited trades using another FA number. As a
result, clients that were blocked from additional mutual fund transactions were able to continue market timing because of the representatives’ ability to obtain a new FA number to circumvent the block. 
 PSI knew, or was reckless in not knowing, of the following fraudulent activity: 
  

	 	•	 	PSI representatives misrepresented their own identities and the identities of their clients in order to engage in market timing trades after the funds had blocked the
representatives and/or their clients from such trading. As noted, PSI received thousands of communications from mutual fund companies relating to blocks placed continually on a limited number of representatives and clients. For example, during the
relevant period, PSI received in excess of 1,000 letters and/or e-mails from over 50 different mutual fund companies relating just to the market timing activities of five representatives in its Boston branch office. In numerous cases, PSI did not
prevent trading in circumvention of these blocks. To evade the blocks and continue trading, certain representatives were able to set up new accounts for their clients and/or obtain alternate FA numbers to process trades. 

  

	 	•	 	 In January 2003, based upon the number of letters PSI received relating to the market timing activities of its representatives, it announced a market timing policy
(some two years after it had already stopped market timing in its own proprietary mutual funds). The policy required PSI’s representatives to adhere to the restrictions on the frequency of trading set forth in each mutual fund’s disclosure
documents. The policy also provided that a request from a mutual 

  

 5 

	 	 
fund to block an FA number would be applied to all FA numbers associated with that representative. Notwithstanding this policy, PSI representatives were able
to continue to use their pre-existing FA numbers and the numerous client accounts to continue market timing despite the mutual fund blocks. Moreover, certain representatives were able to obtain new FA numbers, which were used to continue the market
timing activity. 

  

	 	•	 	PSI representatives used “joint” FA and “also” numbers to evade the mutual fund blocks and defraud the mutual funds into accepting additional transactions.
“Joint” FA numbers were generally permitted by PSI for the purpose of splitting commissions, and “also” numbers were permitted by PSI ostensibly to enable certain clients to access their account information electronically. Three
Boston representatives, however, obtained 16 “joint” numbers and three “also” numbers that they were able to use to defraud mutual fund companies into accepting additional transactions on behalf of their clients. PSI was aware
that the Boston representatives were primarily engaged in market timing transactions. 

  

	 	•	 	In several instances, certain PSI representatives transferred client monies between and among their client’s multiple accounts in order to evade a mutual fund block. PSI knew,
or was reckless in not knowing, that the “new” or additional account numbers related to the same client; that the same money was being transferred between accounts; and that that money was being used to continue trading in contravention of
mutual fund blocks, or to otherwise exceed prospectus exchange limits. For example, in January 2001, a mutual fund company blocked some of the market timing accounts of a client. The representatives in the Boston branch office contacted the client
who then transferred the money from the blocked accounts into other accounts at PSI and continued the market timing trading despite the block. 

  

	 	•	 	Notwithstanding PSI’s knowledge that certain of its registered representatives had engaged in deceptive practices, the firm took no disciplinary action against them.

  

	 	•	 	Certain of PSI’s customers were able to exchange mutual fund shares beyond the annual limits described in the applicable prospectus. As a result, at least 1,600 PSI customer
accounts engaged in market timing transactions and were collectively able to purchase and sell mutual fund shares worth more than $116 billion. Moreover, some of this activity was inconsistent with the terms of certain PSI mutual fund dealer
agreements. PSI earned nearly $50 million in gross commissions from the improper market timing transactions and the client accounts made in excess of $162 million in net profits. 

  

	 	•	 	PSI failed to disclose to all of its customers that certain market timing customers were able to exceed the prospectus exchange limits. 

 This conduct constitutes separate and distinct violations of Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and NASD Conduct Rules 2120 and
2110, and IM-2310-2. 
  

 6 

 PSI Failed To Maintain Accurate Books and Records 
 From at least January 2001 through August 2003, PSI failed to make, maintain and preserve accurate books and records related to mutual fund transactions.
PSI, among other things, failed in numerous instances to make and preserve order tickets, and make, maintain and preserve adequate trade blotters, relating to mutual fund transactions. Moreover, where order tickets had been prepared, PSI failed in
numerous instances to document the time the customer order was received by the firm and the time certain orders were executed.2 For example, there was an absence of time stamps on numerous order tickets, making it difficult to determine whether the order was received before 4:00 p.m. on the trade date or whether the representative engaged in late trading by
accepting and processing an order “after hours” in mutual funds. Moreover, certain orders that had time stamps had inaccurate times relating to when they were received at the firm. This conduct constitutes separate and distinct violations
of Section 17 of the Exchange Act, Rules 17a-3 and 17a-4 thereunder, and NASD Conduct Rules 3110 and 2110. 
 Supervisory
Violations 
 Since at least 1998, PSI was aware that its Boston branch office had certain representatives whose primary business was
to service clients that engaged in market timing activities. Indeed, the firm’s Risk Management Department had numerous meetings on the activities of those representatives. Nevertheless, PSI failed to maintain a reasonable and adequate
supervisory system and written supervisory procedures relating to market timing, mutual fund exchanges, and detecting and preventing late trading of mutual fund shares. PSI failed to ensure in those areas that its written supervisory procedures were
updated, maintained and enforced; and that they were reasonably designed to achieve compliance with the applicable rules and regulations. The deficiencies in PSI’s system and procedures included the following areas: 
  

	 	•	 	PSI’s supervisory system and written supervisory procedures were not reasonably designed to prevent and detect representatives from circumventing the block letter restrictions.
The firm’s written supervisory procedures failed to provide steps reasonably designed to ensure that when the firm received block letters that its representatives could not circumvent those restrictions, thereby enabling certain clients and/or
accounts to continue to engage in market timing activities. PSI did not prevent its representatives from obtaining additional FA numbers and establishing multiple customer accounts. In some cases, representatives obtained up to five different FA
numbers, which were used to circumvent the trading restrictions placed on accounts and/or clients. As part of their scheme to evade the block letter restrictions, some PSI representatives requested that their clients sign a Letter Of Authorization
(“LOA”) that authorizes 

  

	2	On November 2, 2001, the SEC amended Rules 17a-3 and 4 and announced that the amendments would become effective on May 2, 2003. Pursuant to those
amendments, a broker-dealer is required to record the time the firm received a customer order on the order ticket, even if the order is subsequently transmitted for execution. The SEC intended for these amendments to provide critical trade
information to securities regulators to aid their examinations and investigations. See, Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934, Release No. 34-44992 (November 2, 2001). From at
least May 2003 through July 2003, PSI failed to comply with this requirement. 

  

 7 

 the transfer of money between the client’s accounts. The establishment of multiple accounts, the
widespread use of LOAs by market timing clients, and the frequent transfer of funds among market timing clients’ accounts, were indications to PSI of potential misconduct. The firm, however, failed to establish policies and procedures that were
reasonably designed to prevent and detect the misuse of new accounts and LOAs for market timing. 
  

	 	•	 	PSI did not provide for any dedicated personnel or department to be responsible for receiving, tracking and enforcing compliance with the block letters. In addition, the firm’s
procedures did not require that such communications be forwarded to the firm’s compliance department or another centralized location. 

  

	 	•	 	PSI’s supervisory system and written supervisory procedures were not reasonably designed to ensure that the firm correctly recorded mutual fund order receipt times in instances
where time was material to the execution. The firm’s books and records could not show whether certain mutual fund orders, whether for the execution or cancellation of a transaction, were received before or after 4:00 p.m. For example, the
volume of market timing business in the Boston branch office created significant risk of late trading. Indeed, in a January 2003 e-mail, a PSI registered representative informed one of his market timing clients that “[y]ou don’t realize I
have to kick and claw to get trades off for you guys. I even have given you help after the close.” Therefore, PSI’s supervisory system was not reasonably designed to prevent and detect representatives from engaging in
“after-hours” or late trading in mutual funds. 

  

	 	•	 	PSI’s supervisory system had inadequate checks and balances to ensure, among other things, that registered representatives and their clients adhered to the mutual fund
prospectus restrictions related to market timing activities (e.g., limits on the number of exchanges per year) when alerted by the mutual fund companies that such limitations had been exceeded. 

 This conduct constitutes separate and distinct violations of NASD Conduct Rules 3010 and 2110. 
  

	 	B.	We also consent to the imposition, at a maximum, of the following sanctions: 

 A censure and $270,000,000 in monetary sanctions. Within ten days of the issuance of this AWC, PSI shall pay the $270,000,000 into an account, not unacceptable to NASD staff, which shall be disbursed in accordance
with the independent consultant plan, as further detailed below, to compensate the affected mutual funds and/or shareholders for losses sustained from at least January 1, 2001 to July 1, 2003 as a result of the improper market timing
activity in PSI customer accounts and other misconduct described above. Those funds shall be disbursed only pursuant to the undertakings set forth below. 
 In addition, we shall comply with the following undertakings within the time periods specified (unless otherwise extended by NASD staff): 
  

 8 

 Retention of an Independent Consultant, 
 Disbursement of Funds and Certification of Payment 
  

	 	a)	PSI shall retain, within 60 days of the issuance of this AWC, an independent consultant (“consultant”) not unacceptable to NASD staff. The consultant’s compensation
and expenses shall be borne exclusively by PSI. The firm shall cooperate fully with the consultant and shall provide the consultant with access to its files, books, records, and personnel as reasonably requested for the review. PSI must not place
restrictions on the consultant’s communications with NASD staff. Upon request, PSI will make available to NASD any and all communications between the consultant and the firm, and any documents that the consultant reviewed or relied upon in
connection with the engagement. 

  

	 	b)	PSI shall not terminate the relationship with the consultant without the NASD staff’s written approval; PSI shall not be in and shall not have an attorney-client relationship
with the consultant and shall not seek to invoke the attorney-client privilege or other doctrine or privilege to prevent the consultant for transmitting any information, reports or documents to NASD. 

  

	 	c)	PSI shall require that the consultant develop a written plan (“Plan”) for the distribution of the $270,000,000, and any interest or earnings thereon, according to a
methodology developed in consultation with the firm and not unacceptable to NASD staff. 

  

	 	d)	PSI shall require that the consultant submit the Plan to the firm and NASD no more than 180 days after the issuance of this AWC. 

  

	 	e)	The Plan shall be binding unless, within 210 days of the issuance of this AWC, either party advises the consultant, in writing, of any determination, calculation or recommendation
from the Plan that it considers to be inappropriate and the reasons for its objection. 

  

	 	f)	With respect to any determination, calculation or recommendation with which PSI or NASD staff do not agree, such parties shall attempt in good faith to reach an agreement within 240
days of the issuance of this AWC. In the event that they are unable to agree on an alternative determination, calculation or recommendation, the ultimate determinations, calculations and recommendations of the consultant shall be binding.

  

 9 

	 	g)	Within 360 days of the issuance of this AWC, the consultant and the firm shall implement the Plan and take all necessary and appropriate steps to distribute the account’s
funds. 

  

	 	h)	Within ten days thereafter, an officer of PSI shall certify to NASD that the Plan has been implemented and that the $270,000,000, and any interest or earnings thereon, has been
disbursed. 

  

	 	i)	PSI shall require the consultant to enter into a written agreement that provides that, for the period of engagement and for a period of two years from completion of the engagement,
the consultant not enter into any other employment, consultant, attorney-client, auditing or other professional relationship with PSI, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as
such. Any firm with which the consultant is affiliated in performing his or her duties pursuant to this AWC, shall not, without the prior written consent of NASD staff, enter into any employment, consulting, attorney-client, auditing or other
professional relationship with PSI, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years thereafter.

 The sanctions imposed herein shall be effective on a date set by NASD staff. 
 III. 
 OTHER MATTERS 

 

	 	A.	We understand that we may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. We understand
that we may not deny the charges or make any statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by NASD, nor does it reflect the views of NASD or its staff.

  

	 	B.	We specifically and voluntarily waive any other right to claim that we are unable to pay, now or at any time hereafter, any monetary sanction imposed in this matter.

 We certify that we have read and understand all of the provisions of this AWC and have been given a full opportunity to ask questions about
it, and that no offer, threat, 

  

 10 

 
inducement, or promise of any kind, other than the terms set forth herein, has been made to induce us to submit it. 
  

							
		 		 	Prudential Securities, Incorporated, n/k/a Prudential Equity Group, LLC, Respondent
				
	 August 9, 2006
	 		 	By:	 	 /s/ Kenneth Y. Tanji

	Date:	 		 		 	Print Name: Kenneth Y. Tanji
		 		 		 	Title: Senior Vice President

  

					
	Accepted by NASD:	 		  	
	 August 28, 2006
	 		  	  
 Signed on behalf of the

	Date	 		  	Director of ODA, by delegated authority
			
		 		  	 /s/ Paul M. Tyrrell
 Paul M.
Tyrrell

		 		  	Regional Counsel
		 		  	NASD Department of Enforcement
		 		  	99 High Street
		 		  	Suite 900
		 		  	Boston, MA 02110
		 		  	(617) 532-3426
			
		 		  	NASD District Director:
		 		  	Frederick F. McDonald, Jr.
		 		  	NASD
		 		  	Boston District Office
		 		  	99 High Street
		 		  	Suite 900
		 		  	Boston, MA 02110
		 		  	(617) 532-3400

  

 11New York Stock Exchange Hearing Board Decision announced on August 28, 2006

 Exhibit 10.5 
 N  E  W    Y  O  R  K    S  T  O  C  K    E  X  C  H
  A  N  G  E    L  L  C 
  

			
	NYSE HEARING BOARD DECISION 06-156	  	August 18, 2006
	PRUDENTIAL EQUITY GROUP, LLC	  	
	MEMBER ORGANIZATION	  	

 *    *    * 
 Violated Section 10(b) of Securities Exchange Act of 1934, Rule 10b-5 thereunder, and NYSE Rule 476(a)(5) by using means or instrumentality of
facility on national securities exchange, in connection with purchase or sale of security, to defraud, make untrue statement of material fact, or engage in act, practice, or course of business which operates as fraud or deceit; violated
Section 17(a) of Securities Exchange Act of 1934 and Rules 17a-3 and 17a-4 thereunder by failing to make and keep accurate books and records, including trade blotters and trade tickets; violated NYSE Rules 401 and 476(a)(6) by allowing certain
brokers to engage in deceptive practices related to market timing of mutual funds; violated NYSE Rule 342 by failing to reasonably supervise its business activities and to establish and maintain appropriate procedures for supervision and control
with respect to its business activities involving trading of mutual funds – Consent to censure, $270 million disgorgement, and undertakings. 
 Appearances: 
  

			
	For the Division of Enforcement	  	For Respondent
	Susan Light, Esq.	  	Gail Marshall-Smith, Esq.
	Margaret Tolan, Esq.	  	Neil Sullivan, Esq.

 *    *    * 
 A Hearing Officer on behalf of the New York Stock Exchange LLC (“NYSE”) considered a Stipulation of Facts and Consent to Penalty entered into between NYSE
Regulation, Inc.’s Division of Enforcement (“Enforcement”) and Prudential Equity Group, LLC, formerly known as Prudential Securities, Inc. (“Respondent,” “PSI,” or the “Firm”), an NYSE member
organization. Without admitting or denying guilt, Respondent consented to a finding by the Hearing Officer that it: 
  

	 	I.	 Willfully violated Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. section 78j(b)] (the “Exchange Act”), Rule 10b-5 thereunder [17
C.F.R. section 240.10b-5], and NYSE Rule 476(a)(5) by using any means or instrumentality of interstate commerce or of the mails, or of any facility on any national securities 

	 	 
exchange, in connection with the purchase or sale of any security, to employ any device, scheme, or artifice to defraud, to make any untrue statement of a
material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or to engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any person. 

  

	 	II.	Failed to make and keep required books and records in violation of Section 17(a) of the Exchange Act. Section 17(a)(1) of the Exchange Act required PSI to make and keep
current certain specified books and records relating to its business. Implicit in the U.S. Securities and Exchange Commission’s (the “Commission”) recordkeeping rules is a requirement that information contained in a required book or
record be accurate. Rules 17a-3 and 17a-4 enumerate those records required to be maintained, including trade blotters and trade tickets. PSI failed to maintain complete and current copies of trade blotters concerning mutual fund trading and trade
tickets related to mutual fund trading in a readily accessible place. In instances where PSI did maintain trade tickets, information included on them did not represent the actual time at which the orders were placed. 

  

	 	III.	Violated NYSE Rule 476(a)(6) in that it engaged in conduct inconsistent with just and equitable principles of trade by allowing certain of its brokers to engage in deceptive
practices related to the market timing of mutual funds 

  

	 	IV.	Violated NYSE Rule 401 in that it failed to adhere to the principles of good business practice by allowing certain of its brokers to engage in deceptive practices related to the
market timing of mutual funds. 

  

	 	V.	Violated NYSE Rule 342 by failing to reasonably supervise its business activities, and to establish and maintain appropriate procedures for supervision and control with respect to
its business activities involving the trading of mutual funds. 

 For the sole purpose of settling this disciplinary proceeding, Enforcement
and Respondent stipulate to certain facts,* the substance of which follows:1 
 Background and Jurisdiction 
  

	 	1.	PSI was a member organization of the NYSE and maintained its headquarters and principal place of business in New York. Prior to July 1, 2003, PSI was an indirect wholly-owned
broker-dealer subsidiary of Prudential Financial, Inc. (“Prudential 

  

	*	Hearing Officer Note: The facts, allegations, and conclusions contained in paragraphs 1 to 45 are taken from the executed Stipulation of Facts and Consent to Penalty between
Enforcement and Respondent. No changes have been made to the stipulated paragraphs by the Hearing Officer. 

	1	The findings made herein are not binding on Respondent or any other Prudential Financial, Inc. entity in any other forum, nor are the findings binding on any other
person or entity. 

  

 2 

 Financial”). Prudential Financial is a publicly-owned holding company, traded on the New York Stock
Exchange, whose operating subsidiaries provide a wide range of insurance, investment management and other financial products and services to retail and institutional customers including insurance brokers and investment managers. On July 1,
2003, PSI transferred the assets relating to its U.S. retail securities brokerage operations to a newly formed holding company, now named Wachovia Securities Financial Holdings, LLC (“WSFH”). Prudential Financial presently owns 38% of WSFH
and Wachovia Corporation owns 62% of WSFH. Since July 1, 2003, PSI’s former U.S. retail securities brokerage business has operated as part of Wachovia Securities, LLC. Following the asset transfer, PSI converted from a stock corporation
into a limited liability company and was renamed Prudential Equity Group, LLC (“PEG”). PEG is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act and is a member of the National Association of
Securities Dealers and the New York Stock Exchange. PEG provides equity research, sales and trading to domestic and international institutional customers and is a successor entity to PSI. Prudential Financial continues to own 100% of the equity
interests in PEG. 
  

	 	2.	On or about October of 2003, Enforcement notified Respondent of its investigation into possible violative conduct involving the market timing of mutual funds by certain of
Respondent’s registered representatives and of its supervision of its mutual fund trading business. 

 Summary

  

	 	3.	This matter concerns a fraudulent market timing scheme perpetrated by PSI registered representatives (collectively, the “Brokers”) whose business involved market timing to
defraud at least fifty mutual funds and their long term shareholders. Beginning in at least September 1999 and continuing through at least June 2003 (the “Relevant Period”), the Brokers used deceptive trading practices to conceal their
identities, and those of their customers, to evade mutual funds’ prospectus limitations on market timing. These practices included the use of multiple broker identifying numbers (known as Financial Advisor, or “FA” numbers) and
multiple customer accounts; the use of accounts coded as confidential in PSI’s systems; and the Brokers’ use of “under the radar” trading to avoid notice by mutual funds. Typically, mutual funds screened for market timing trades
only above a designated dollar amount. The practice of “under the radar” trading refers to the Brokers’ splitting of one trade into numerous smaller ones to avoid detection by mutual funds. 

  

	 	4.	As early as the fourth quarter 1999, several mutual fund companies identified the Brokers’ use of deceptive trading practices and notified PSI of the Brokers’ conduct. In
May 2002, PSI itself determined that its top-producing broker used deceptive trading practices to avoid notice by mutual funds. Throughout the Relevant Period, PSI received hundreds of notices from mutual fund companies that identified the
Brokers’ conduct and asked the Firm to take steps to curtail their deceptive market timing practices. 

  

 3 

	 	5.	Despite PSI’s increasing awareness of the Brokers’ fraudulent market timing practices, the Firm elected to continue the business of market timing. Rather than discipline
or sanction any of the Brokers or even curtail their ability to open additional accounts for their market timing customers, PSI failed to prevent their conduct from continuing and actually began to track the Brokers’ gross revenues. In 2001,
for example, the Brokers generated more than $16 million in gross commission revenues for the Firm, most of which was in danger of being eliminated had the Firm phased out market timing at that time. Similarly, the Brokers generated approximately
$23 million in gross commission revenues in 2002, and continued to generate comparable revenues throughout the Relevant Period. 

  

	 	6.	PSI’s policies and procedures were ineffective in curtailing the Brokers’ fraud and were largely not enforced. Even in situations where PSI purportedly enforced any of
these policies, PSI senior officers undermined them by granting exceptions for PSI’s largest producing brokers. Additionally, PSI repeatedly failed to deprive the Brokers of their inappropriate use of hundreds of FA numbers, even though the use
of multiple FA numbers was the primary means by which the Brokers carried out their fraud. PSI finally issued a market timing policy in January 2003, but the Firm did not fully enforce procedures in that policy to curtail the Brokers’ scheme.
As a result of the conduct described above, PSI violated the antifraud and books and records provisions of the federal securities laws, and NYSE Rules 401, 476(a)(5)-(6), 440 and 342, which relate to good business practices, just and equitable
principles of trade, NYSE books and records requirements and failure to supervise. 

 Background 
  

	 	7.	Market timing includes frequent buying and selling of shares of the same mutual fund or buying or selling of mutual fund shares in order to exploit inefficiencies in mutual fund
pricing. Though not illegal per se, market timing can harm mutual fund shareholders because it can dilute the value of their shares, if the market timer is exploiting pricing inefficiencies, or disrupt the management of the mutual fund’s
investment portfolio and can cause the targeted mutual fund to incur costs borne by other shareholders to accommodate frequent buying and selling of shares by the market timer. 

  

	 	8.	Beginning in the late 1990s, many mutual funds determined that market timing harmed their long-term shareholders. As a result, they began to monitor market timing in their
funds’ shares and imposed restrictions on excessive trading. Such restrictions limited the number of trades that an account holder could place in a fund’s shares and often were set forth in the funds’ prospectuses. Many funds
monitored trading activity to detect any violations of these prospectus limitations. 

  

	 	9.	 Most mutual funds received trade instructions from PSI through the National Securities Clearing Corporation (“NSCC”). NSCC is a centralized trade
clearance and settlement system that linked the Brokers, PSI, and virtually all mutual fund 

  

 4 

	 	 
companies. To place trades that were transmitted through NSCC, the Brokers were required to identify their FA number and a customer account to mutual funds
on trade tickets. PSI appended additional information to the Brokers’ orders and transmitted the transactions through NSCC to the mutual fund companies. 

  

	 	10.	Some mutual funds screened for excessive short -term trading by reviewing FA and customer account numbers that the Brokers transmitted to them via NSCC. Some also monitored for
excessive short -term trading by trade size and principal amount and by the branch code attached to a trade.2 Typically, if a fund concluded that a shareholder had violated its exchange limitations, the fund
would attempt to prevent, or “block” additional trades in a fund or fund family by that shareholder. If a fund determined that a particular PSI broker or shareholder had violated its exchange limitations, the fund would send a “block
letter” to PSI. Block letters varied but generally notified PSI of the mutual fund’s intention to block the broker or customer’s transaction and often asked PSI to take steps to preclude a particular broker or customer account from
engaging in additional trades in a particular fund or fund family. 

  

	 	11.	Because these mutual funds monitored for excessive trading by FA number and/or customer account number, the Brokers altered their use of these numbers to defraud these funds and the
funds’ long-term shareholders. By altering their use of these numbers, the Brokers tricked mutual fund companies into accepting trades that the funds otherwise would have rejected. 

 The Brokers’ Deceptive Conduct 
  

	 	12.	During the Relevant Period, the Brokers engaged in a fraudulent scheme to circumvent blocks imposed by mutual funds on their trading privileges. The Brokers’ scheme worked as
follows. The Brokers’ customers, typically hedge funds, asked the Brokers to purchase and sell mutual funds on a short-term basis on their behalf. The Brokers, however, knew that mutual funds tracked their trades by FA number and customer
account number, and they knew that if they placed short-term mutual fund trades for their customers using a single FA or account number, the mutual funds would likely determine the number of trades was excessive and would block any further trades by
them. 

  

	 	13.	The Brokers, therefore, devised a scheme to conduct their customers’ trading using dozens of customer accounts, often established under fictitious names, and multiple FA
numbers to make it difficult for mutual funds to identify their customers’ market timing. When the mutual funds succeeded in blocking certain FA numbers or customer accounts from further trading, the Brokers then used other FA numbers and
customer accounts that had not yet been blocked to evade the funds’ restrictions and continue to trade. 

  

	2	PSI assigned branch codes to each of its retail branch offices. Branch codes identified to mutual funds the PSI branch office from which a particular market timing
trade originated. 

  

 5 

 The Boston Brokers 
  

	 	14.	For example, one group of PSI brokers based in its Boston, Massachusetts branch office (the “Boston Brokers”) repeatedly used these deceptive practices to defraud mutual
funds throughout the Relevant Period. The Boston Brokers consisted of a group of three PSI brokers and several registered assistants. The group had five customers for whom it placed market timing trades, each of whom acted on behalf of one or more
hedge funds. During the Relevant Period, PSI received approximately $8 million from the Boston Brokers’ market timing activities, of which group members received approximately $4.6 million. As a result of this business, the head of the group
quickly rose to become one of PSI’s top producers. 

  

	 	15.	Many of the mutual funds in which the Boston Brokers traded screened for market timing trades by FA and customer account numbers. Many fund companies sent notices to PSI that
complained that the group’s trades had violated prospectus limitations. Some mutual funds announced steps they had taken to preclude the Boston Brokers from further trading while others asked that PSI take steps to block further trades by the
group in the fund. 

  

	 	16.	During the Relevant Period, the Boston Brokers used at least thirteen FA numbers and hundreds of customer accounts (for what were, in reality, only five customers) to circumvent
these blocks and preclude new blocks. The Boston Brokers’ use of these devices in connection with market timing allowed group members to continue to place trades in funds that had taken steps to preclude them from further trading. This scheme
created the impression that transactions originated from many brokers and represented many different customers. In fact, what appeared to the mutual funds to be thousands of separate transactions submitted by many brokers for many unrelated
customers was actually a systematic pattern of market timing by group members on behalf of their five hedge fund customers. 

 The Garden City Broker 
  

	 	17.	Another PSI broker based in its Liberty Plaza and Garden City, New York branch offices (the “Garden City Broker”) used these same deceptive practices to defraud mutual
funds throughout the Relevant Period. The Garden City Broker headed a team of brokers and registered assistants, although he very rarely reported to work at any PSI location. He had five customers for whom he placed market timing trades, each of
whom acted on behalf of one or more hedge funds. During the Relevant Period, PSI received approximately $9.8 million from the Garden City Broker’s market timing activities (of which the Garden City Broker received approximately $4.7 million).
The Garden City Broker was the top producing broker at PSI throughout the Relevant Period. 

  

	 	18.	Like the Boston Brokers, the Garden City Broker traded in mutual funds that screened for market timing by FA and customer account number. During the Relevant Period, approximately
fifty mutual funds complained to PSI about the Garden City Broker’s trading activity. Many mutual funds specifically identified to PSI his use of deceptive trading strategies to evade blocks the fund companies had imposed.

  

 6 

	 	19.	To evade these blocks, the Garden City Broker maintained 49 different FA numbers and hundreds of customer account numbers (for what were, in reality, only five customers). His use
of these devices to market time created the impression that the trades originated from many brokers and many customers. By shifting trades from one FA number to another, or from one customer account to another, the Garden City Broker concealed his
identity and was able to place trades in mutual funds where PSI previously had blocked his trading under his other FA numbers and accounts. 

 The Special Accounts Brokers 
  

	 	20.	Another group of PSI brokers based in a New York office known within the Firm as “Special Accounts” (the “Special Accounts Brokers”) also used deceptive
practices to defraud mutual funds throughout the Relevant Period. The Special Accounts Brokers consisted of a group of two PSI brokers and several registered assistants. The group had three customers for which it placed market timing trades. During
the Relevant Period, PSI received approximately $6.5 million from the Special Accounts Brokers’ market timing activities, of which group members received approximately $2.5 million. As a result of this business, the heads of the group quickly
achieved membership in PSI’s Chairman’s Club, a select group consisting of the largest producing brokers within the Firm. 

  

	 	21.	Like the Boston Brokers and the Garden City Broker, the Special Accounts Brokers knew that most mutual funds identified excessive trading by FA and customer account number. They
also understood that mutual funds screened for market timing by reviewing only those trades at or exceeding certain dollar amounts. The Special Accounts Brokers used at least 20 FA numbers and hundreds of customer accounts (for what were, in
reality, only three customers) to avoid detection by mutual funds. The Special Accounts Brokers also used “under the radar” trading to disguise their customers’ trading in funds that previously had taken steps to stop them. The
brokers’ use of these devices in connection with market timing deceived mutual funds into accepting trades they otherwise would have rejected. Like the Boston Brokers and the Garden City Broker, their scheme perpetuated the impression that
transactions originated from many brokers and represented many different customers. 

 PSI Failed to Prevent the Brokers
From Obtaining Multiple Broker 
 Identification and Customer Account Numbers 
  

	 	22.	 PSI failed to prevent the Brokers from obtaining several different forms of broker identifying numbers. Consequently, the Brokers used these numbers to perpetrate
their scheme to defraud. When brokers began their employment with PSI, PSI assigned them an FA number. The Brokers used FA numbers to open customer accounts, execute trades, and track their commissions. When brokers worked as a team to service
common customers, PSI provided “Joint” numbers. Joint numbers 

  

 7 

	 	 
ostensibly represented a commission split between two or more brokers. Here, the Brokers acquired and used Joint numbers for improper purposes. The numbers
were not used to split commissions, but rather to facilitate the Brokers’ ability to trade after their other broker identifying numbers had been blocked from trading. PSI also provided the Brokers with “Also” numbers. The purported
purpose of “Also” numbers was to allow the Brokers’ customers to access only those portions of a given broker’s portfolio that belonged to that customer or to provide certain customers with commission discounts. The Brokers,
however, used Also numbers improperly in the same manner as they used FA and Joint Numbers – to circumvent blocks that had been imposed on their other FA numbers. Indeed, at least one mutual fund became so frustrated by its inability to
identify the Brokers that it threatened to curtail the trading privileges of all brokers within a PSI branch to remedy the conduct. 

  

	 	23.	Each of the Brokers maintained numerous FA, Joint, and Also numbers, and used these numbers interchangeably to execute trades for their customers. For example, the Boston Brokers
used 13 broker identifying numbers to place market timing trades and the Garden City Broker used 49 broker identifying numbers. When one of the Broker’s FA, Joint, or Also numbers was blocked from trading by a particular mutual fund, he used
another number assigned to him to place the trade in that fund. Although each joint number ostensibly represented a unique commission split, in fact each team of Brokers split commissions from mutual fund purchases according to a single ratio,
irrespective of which broker identifying number was used to enter the trade. 

  

	 	24.	PSI failed to prevent the Brokers from opening hundreds of customer account numbers. The Brokers’ customers maintained multiple accounts with PSI, many of which bore fictitious
names that had no relation to the actual customer’s name. The Brokers used these customer accounts interchangeably to execute trades. When one customer account was blocked from trading by a particular mutual fund, the Brokers substituted
another account for that same customer to place the trade for that customer, thereby creating the appearance that the trade originated from another customer. 

  

	 	25.	PSI failed to prevent the Brokers from obtaining accounts for their customers that were coded as “Confidential.” Confidential accounts did not identify the beneficial
owner of the account on the transaction data provided to the mutual funds. Although such a designation could have a legitimate purpose, here the Brokers used Confidential accounts improperly to impede the mutual funds’ ability to identify which
PSI broker or customer was market timing their funds. 

  

	 	26.	PSI also failed to prevent the Brokers from obtaining customer account numbers with multiple branch identifiers. Typically, brokers located in one PSI branch office had customer
accounts that had a prefix used to identify the branch location. Here, the Brokers established accounts for their hedge fund customers using multiple branch codes, which effectively impeded the mutual funds’ ability to identify the particular
PSI office location, as well as broker, that was market timing their funds. The Brokers used branch identifiers improperly as another mechanism to conceal their identities and the identities of their customers to mutual funds.

  

 8 

 PSI Received Notifications of the Brokers’ Deceptions 
  

	 	27.	During the Relevant Period, mutual fund companies sent more than a thousand letters and emails to PSI concerning market timing by the Brokers. Many of these communications asked PSI
to take steps to stop further trading by a particular customer account or FA number. Others expressly notified PSI that the Brokers used deceptive trading practices to continue placing market timing trades. 

  

	 	28.	High level officers of PSI were aware during the Relevant Period that mutual funds were accusing the Brokers of using deceptive practices to evade the mutual funds’ attempts to
block the Brokers’ market timing trades. For example, an individual who joined PSI in 1997 and rose to become the chief administrator of PSI’s Private Client Group (“PCG”) in January 1999, then to become executive director of PCG
in November 2000, and finally to president of PCG in December 2002 (“the Senior Officer”) received repeated notices of wrongdoing by the brokers throughout the Relevant Period, but did not take adequate steps to stop the Brokers’
fraud. Among other things, the Senior Officer received the following indications that the Brokers were committing fraud. In some cases, certain other senior managers or high level officers of PSI also received notices that the Brokers were
committing fraud. 

  

	 	29.	On November 21, 1999, a senior executive in the PSI Mutual Fund Operations division forwarded to the Senior Officer a string of emails concerning a complaint from a mutual fund
complex that the Garden City Broker had evaded a block on two of his accounts by simply opening new accounts. Among other things, the email stated: 

 It appears that [the Garden City Broker] circumvented this restriction by requesting new BIN [account] #s and fund accounts be established, funded by transferring shares into these new accounts on 11/8/99.
Subsequently on 11/10/99, an exchange out of the money fund into our stock funds was processed, beginning market timing again. 
 The cover
email commented, “[T]his seems to be a serious matter that will only get worse.” 
  

	 	30.	On January 19, 2000, the manager of PSI’s Mutual Fund Operations division forwarded to the Senior Officer an email from another mutual fund complex complaining that a
member of the Boston Brokers had evaded a trading restriction by opening a new account, stating: 

 It appears that [the
member] set up another account in December for the same client we restricted on 11/22. 
  

 9 

	 	31.	On March 30, 2001, the head of PCG risk management sent to the Senior Officer an email that attached a letter from another mutual fund complex complaining that “excessive
trading activity” by PSI brokers in its mutual funds “has become detrimental to both the funds and shareholders of the funds involved.” The letter described the tactics used by PSI brokers to avoid having their trades canceled as
follows: 

 Since trade cancellation began on February 26th, 2001, we have noticed several types of reactions by Prudential Financial Advisors in order to circumvent our attempts to terminate excessive trading.
Originally, your Financial Advisors established new identification numbers so that they would not be recognized as a repeat offender. Secondly, Financial Advisors would transfer a fund(s) position from account to account, in order to disguise their
identity. Lastly, your Financial Advisors have attempted to reduce the dollar amount of the exchange orders while simultaneously increasing the number of exchanges (in the same fund and account) in the hopes of not being identified. 
  

	 	32.	On June 28, 2001, the Senior Officer received an email from the manager of the Special Accounts branch warning him that the Special Accounts Brokers were obtaining multiple FA
numbers in order to conduct their market timing, stating that: 

 We will have an issue soon with joint FA numbers: in order to
get around the MF [mutual fund] timing issue they are starting to request 99/01 split numbers with their junior partners to help them get around being shut down by some MF companies on timing. 
  

	 	33.	On April 4, 2002, the manager of PSI’s Mutual Funds Operations division sent an email to other senior managers forwarding an email from another mutual fund complex
complaining that certain PSI brokers were using multiple accounts and FA numbers to evade restrictions on their market timing. The email stated: 

 What we have seen scares us. It appears certain representatives are changing account registrations, tax id numbers, and branch and rep numbers in an effort to time the [mutual fund complex’s] funds. All of these
accounts have been stopped, but each day “new” ones pop up. 
 When the PSI chief compliance officer saw the above email, he showed
it to the Senior Officer. The head of PCG risk management also discussed the email with the Senior Officer. 
  

	 	34.	On April 29, 2002, the Senior Officer met with an internal PSI working group that had been analyzing market timing issues. The group described for the Senior Officer the mutual
fund companies’ restrictions on excessive trading, the fund companies’ block letters to PSI, and the deceptive trading strategies used by certain PSI brokers, including multiple accounts and FA numbers. 

  

 10 

	 	35.	On at least two occasions in May 2002, an employee of PSI’s risk management division detailed for the Senior Officer several deceptive practices used by the Garden City Broker.
The employee’s analysis noted that in one 37-day period, the Garden City Broker had 19 different mutual fund companies request that accounts under the broker’s control, or the broker as an FA, be blocked from their funds. The analysis
concluded that the Garden City Broker had circumvented these requests by changing his FA number to an Also or Joint Number to avoid detection by the fund, or by changing customer account numbers and moving the assets from the blocked account to a
newly established account. 

  

	 	36.	On February 5, 2003, the director of strategic planning at PCG sent the Senior Officer (then the President and most senior officer of PCG) a string of emails from another
mutual fund complex complaining that certain PSI brokers were using multiple customer accounts and FA numbers for market timing. One of the emails stated: 

 I have spoken to these reps a few times over the past several months about stopping their timing activity to no avail. Over the past several months, we have placed stops on 325 of their accounts as of 11/30/02 and
continue to add accounts daily. We see new accounts/rep id combinations being opened and have determined that we are not able to continue chasing them within our funds. We feel our only course of action to protect our fund shareholders is to
prohibit the attached list of reps from doing business with [our funds]. 
 Another email in the string stated: 
 These reps have multiple rep ids and have continued to add new ones as we block the ids within the NSCC trading system for our fund complex... These
reps created close to $3 billion in exchanges last year with $75 million of assets during a time in which we placed stops on 350 of their accounts. 
 The director of strategic planning added his own warning to the Senior Officer: 
 I just wanted to give you a heads up on an issue
that is sure to reach your desk in the next day or two. As you can see from the attached string of notes, the senior leadership team at [a mutual fund complex] are completely frustrated with some of the tactics/strategies of FA’s [the Garden
City Broker and the Boston Brokers]. Previous attempts to curtail timing activity in the [mutual fund complex’s] funds by blocking account activity have been thwarted by the establishment of additional FA numbers. It appears that [the mutual
fund complex] is now making overtures that continued activity of this nature will threaten the relationship between Prudential and the fund company. 
  

	 	37.	 On February 11, 2003, a PCG risk officer sent an email to the Senior Officer (then the President and most senior officer of PCG) that forwarded an email from
the Garden City branch manager about the Garden City Broker’s market timing business. The branch manager questioned the effectiveness of the Mutual Fund Operations 

  

 11 

	 	 
division’s internal blocking system and raised several other concerns about the Garden City Broker’s activities: 

 Blocking of individual accounts by fund companies is extremely short-sighted in consideration of the fact that each “entity” maintains multiple
accounts with our Firm. 
 There have been repeat offenses, at least in spirit... 
 Fund companies have been mislead as to the identity of the FA’s of record... Recently, [a mutual find company ] was provided with information
which was at best misleading to effect the removal [of] a block. 
 [T]here is frequent journaling of funds between accounts. 
 At the present time, [the Garden City Broker and an assistant] either have or have had a total of 48 FA #’s including single, joint and also
numbers. 
 PSI’s Procedures to Limit Market Timing Were Ineffective 
  

	 	38.	Although PSI senior officers issued policies and procedures ostensibly designed to proscribe the Brokers’ conduct, these policies and procedures were ineffective in scope and
were never fully enforced. Moreover, even in situations where these policies and procedures purportedly were enforced, PSI senior officers undermined them by granting exceptions for its largest producing brokers. As a result, the Brokers’
deceptions continued even after these policies and procedures were promulgated. 

 PSI’s June 2002
Procedure Concerning Issuance of FA Numbers 
  

	 	39.	In June 2002, PSI instituted a procedure concerning the issuance of FA numbers, in a purported effort to hinder the Brokers’ ability to obtain “Joint” numbers and
“Also” numbers to evade limitations on market timing (the “June 2002 Procedure”). The June 2002 Procedure provided, simply, that requests for “Joint” and “Also” numbers would require a documented business
request and a PSI Regional Business Manager’s approval. The June 2002 Procedure failed to preclude the Brokers from misusing previously issued Joint and Also numbers to evade blocks imposed by mutual fund companies. Indeed, the Garden City
Broker obtained 12 new Joint and Also numbers just days before the procedure took effect, purportedly to assist him in transferring customer accounts from one PSI branch office to another. The June 2002 Procedure also did not subject the Brokers to
any form of discipline or sanction if they continued to use Joint and Also numbers to evade blocks in violation of its terms. 

  

 12 

 PSI’s January 2003 Market Timing Policy 
  

	 	40.	After protracted discussion involving PSI senior officers and attorneys during the Fall of 2002, PSI issued a market timing policy on January 8, 2003 (the “Market Timing
Policy”). PSI considered, and rejected, defining market timing in the Market Timing Policy as a certain number of trades because of concerns that doing so would have too great an impact the Brokers’ revenues. PSI also rejected an absolute
prohibition on the business of market timing. Instead, the Market Timing Policy provided that “inappropriate timing activities [would] continue to be monitored” by mutual fund companies and not by PSI itself. 

  

	 	41.	Unlike other PSI policies concerning market timing, the Market Timing Policy expressly provided for the imposition of sanctions, including termination of employment, for the
brokers’ use of “manipulative techniques” to evade mutual fund trading restrictions. Any imposition of sanctions was to be decided by a committee consisting of members of PSI’s Legal, Compliance, and Risk Management divisions.
Despite notifications of continuing deceptive practices received by PSI after it issued the Market Timing policy, PSI did not form this committee and failed to take action against any of the Brokers to stop their use of “manipulative
techniques” to market time. 

  

	 	42.	The Market Timing Policy also provided that, in the event a mutual fund company asked PSI to block any one of a broker’s FA numbers, all numbers belonging to the broker
similarly would be blocked from trading. However, PSI senior officers determined not to implement this critical aspect of the Market Timing Policy. In fact, despite the policy’s clear language, PSI interpreted mutual fund block requests after
it issued the Market Timing Policy in the same manner as it had previously – as narrowly as possible, blocking only the specific FA number or customer account number identified by mutual fund block requests. Thus, even after issuance of the
Market Timing Policy, the Brokers were able to continue their fraudulent scheme of switching to unblocked FA numbers or customer accounts to evade blocks imposed by mutual fund companies. 

 PSI Profited From the Brokers’ Deceptive Acts 
  

	 	43.	PSI identified the Brokers as early as 2000 and monitored their revenues and ranks within the Firm throughout the Relevant Period. The Firm’s Mutual Funds Operations division,
which processed the Brokers’ trades in mutual funds, monitored the Brokers’ activity because their rapid trading required the dedication of additional staff within the department to process the trades and strained the Firm’s trade
processing and settlement systems. 

  

	 	44.	 In 2000, PSI began to track each quarter the gross commission revenues generated by the Brokers. PSI prepared these reports to determine the amount of income that
would possibly be reduced if the Firm determined to eliminate market timing as a business. In 2001, for example, the Brokers generated more than $16 million in gross 

  

 13 

	 	 
commission revenues for the Firm, most of which would have been eliminated had the Firm phased out market timing at that time. Similarly, the Brokers
generated approximately $23 million in gross commission revenues for 2002, and received another $10 million in gross commission revenues during the first half of 2003. 

  

	 	45.	As PSI senior officers became increasingly aware of the Brokers’ use of deceptions, the Firm elected to continue the business of market timing. Indeed, some of the Firm’s
senior officers were aware that the June 2002 Procedure concerning the issuance of multiple FA numbers and the January 2003 Market Timing Policy were wholly ineffective at eradicating the Brokers’ deceptions and that the Brokers and their hedge
fund customers continued this activity. During the Relevant Period, the Brokers generated approximately $50 million in gross revenues as a result of this conduct. 

 DECISION 
 The Hearing Officer, in accepting the Stipulation of Facts and Consent to
Penalty, found Respondent guilty as set forth above. 
 PENALTY 
 In view of the above findings, the Hearing Officer imposed the penalty consented to by Respondent of a censure, the payment of disgorgement in the amount of $270 million,3 and compliance with the following undertakings: 
 Independent Distribution Consultant. Respondent shall retain, within 60 days of this Decision’s becoming final, the services of an independent distribution consultant (the “Independent Distribution Consultant”) acceptable to
Enforcement. 
  

	 	a.	Respondent shall be responsible for all costs and expenses associated with the development and implementation of a distribution plan (the “Distribution Plan”). Such costs
and expenses shall include, without limitation (i) the compensation of a tax administrator for the preparation of tax returns and/or for seeking any IRS rulings; (ii) the payment of taxes; and (iii) the payment of any distribution or
consulting services as may be reasonably required by the Independent Distribution Consultant. Respondent shall cooperate with the tax administrator to see that all tax payments are timely made, and all such tax payments shall be deposited in the
Qualified Settlement Fund upon notice from the tax administrator concerning the amount and the deadline for payment. 

  

	3	Payment of this amount, pursuant to an order issued in a related Commission proceeding involving Respondent and the same underlying facts (the
“Commission’s Order”), shall be deemed payment in satisfaction of the Hearing Board decision in this matter (the “Decision”). The terms of the payment and the distribution of the disgorgement amounts are set forth in the
Commission’s Order. 

  

 14 

	 	b.	Respondent shall cooperate fully with the Independent Distribution Consultant to provide all information requested for its review, including providing access to its files, books,
records, and personnel. 

  

	 	c.	The Independent Distribution Consultant shall develop a proposed Distribution Plan for the distribution of the total disgorgement ordered in this decision, and any interest or
earnings thereon, according to a methodology developed in consultation with and acceptable to the staff of the Commission. 

  

	 	d.	The Independent Distribution Consultant shall submit to Respondent and Enforcement the proposed Distribution Plan no more than 180 days after this Decision becomes final.

  

	 	e.	The proposed Distribution Plan developed by the Independent Distribution Consultant shall be binding, unless, within 210 days after the Decision in this matter becomes final,
Respondent or Enforcement advises, in writing, the Independent Distribution Consultant of any determination or calculation from the Distribution Plan considered to be inappropriate and states in writing the reasons for considering such a
determination or calculation inappropriate. 

  

	 	f.	With respect to any calculation with which Respondent or Enforcement do not agree, such parties shall attempt in good faith to reach an agreement within 240 days of this
Decision’s becoming final. In the event the Respondent and Enforcement are unable to agree on an alternative determination or calculation, the determinations of the Independent Distribution Consultant shall be included in the proposed
Distribution Plan. 

  

	 	g.	Within 285 days of this Decision’s becoming final, the Independent Distribution Consultant shall submit the proposed Distribution Plan for the administration and distribution
of disgorgement funds pursuant to the Securities and Exchange Commission’s Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. Section 201.1100, et seq., (Rules 1100 through 1106). Following a Commission order approving a final
plan of distribution, as provided in Rule 1104 [17 C.F.R. Section 201.1104] of the SEC’s Rules on Fair Fund and Disgorgement Plans, the Independent Distribution Consultant shall take all necessary and appropriate steps to administer the
final plan for distribution of disgorgement funds in accordance with the terms of the approved Distribution Plan. 

  

	 	h.	 For the period of the engagement and for a period of two years from completion of the engagement, the Independent Distribution Consultant shall not enter into any
employment, consultant, attorney-client, auditing, or other professional relationship with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such. Any firm with which the
Independent Distribution Consultant is affiliated in performance of his or her duties under the this Decision, or of which he or she is a member, and any person engaged to assist the Independent Distribution Consultant in the performance of his or
her duties under this Decision, shall not, without prior written consent of Enforcement, 

  

 15 

	 	 
enter into any employment, consultant, attorney-client, auditing or other professional relationship with Respondent, or any of Respondent’s present of
former affiliates, directors, officers, employees, or agents acting in the capacity as such for the period of the engagement and for a period of two years after the engagement. 

  

	 	i.	For good cause shown, Enforcement may alter any of the procedural deadlines set forth above. 

  

	
	For the Hearing Board
	
	 /s/ Peggy Kuo

	Peggy Kuo - Chief Hearing Officer

  

 16

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