Document:

Consent Order, dated August 28, 2006

 Exhibit 10.2 
 COMMONWEALTH OF MASSACHUSETTS 
 OFFICE OF THE SECRETARY OF THE COMMONWEALTH 
 SECURITIES DIVISION 
 ONE ASHBURTON
PLACE, 17TH FLOOR 
 BOSTON, MASSACHUSETTS 02108 
  

					
	  	 	)    	    	
	IN THE MATTER OF:	 	)	    	
		 	)	    	
	PRUDENTIAL EQUITY GROUP, LLC,	 	)	    	
	Formerly Known As PRUDENTIAL SECURITIES	 	)	    	DOCKET NO. E-2003-075
	INCORPORATED	 	)	    	
		 	)	    	
	Respondent.	 	)	    	
	  	 	)	    	

 CONSENT ORDER 
 This Consent Order (“Order”) is entered into by the Massachusetts Securities Division (“Division”) and Respondent Prudential Equity Group, LLC, formerly known as Prudential Securities Incorporated
(“Respondent”) with respect to the administrative complaint (“Complaint”) filed against Respondent in which the Enforcement Section of the Division alleges that the Respondent has violated the Massachusetts Uniform Securities
Act, M.G.L. c. 110A (“Act”) and the corresponding regulations promulgated thereunder (“Regulations”). This Order is the final settlement of those allegations set forth in the Complaint. 
 On August 28, 2006 Respondent submitted an Offer of Settlement (the “Offer”) for the purpose of disposing of only those allegations set
forth in the Complaint. Solely for the purpose of settlement, the Respondent admits to the Division’s Statements of Fact set out in the Offer and consents to the entry of this Order. Therefore, the Division sets forth the following facts and
legal conclusions: 

 I. JURISDICTION AND AUTHORITY 
 1. The Massachusetts Securities Division is a division of the Office of the Secretary of the Commonwealth with jurisdiction over matters relating to
securities, as provided for by the Act. 
 2. The Act authorizes the Division to regulate: (a) the offers and/or sales of securities;
(b) those individuals offering and/or selling securities; and (c) those individuals transacting business as registered agent-dealers and investment advisers within the Commonwealth. 
 3. The Division brings this action pursuant to the enforcement authority conferred upon it by Section 407A of the Act and M.G.L. c. 30A, wherein the
Division has the authority to conduct an adjudicatory proceeding to enforce the provisions of the Act and all corresponding Regulations promulgated thereunder. 
 II. RESPONDENT 
 4. Prior to July 1, 2003, Prudential Securities Incorporated (“PSI”)
was a wholly-owned broker-dealer subsidiary of Prudential Financial, Incorporated (“Prudential Financial”). Prudential Financial is a publicly-owned holding company traded on the New York Stock Exchange (“NYSE”). 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 Securities and Exchange Commission (“SEC”) pursuant to Section 15(b) of the Securities 

  

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Exchange Act of 1934 and is a member of the National Association of Securities Dealers (“NASD”) and the NYSE. Prudential Financial continues to
indirectly own 100% of the equity interest in PEG. PEG is a registered broker-dealer in Massachusetts, Central Registration Depository Number 7471, with a main business address of One New York Plaza, 15th Floor, New York, New York 10292-2015. 
 III.
INITIATION OF FORMAL INVESTIGATION 
 5. In July of 2003, the Division received information from a former PSI registered agent alleging
that certain registered agents of the PSI Boston branch office were engaged in market timing of mutual fund shares, PSI management knew of this activity, and PSI failed to take the necessary action to stop it. 
 6. These PSI registered agents included Martin Druffner, Skifter Ajro and Justin Ficken (the “Druffner Group”). 
 7. The former registered agent alleged that the Druffner Group made a multi-million dollar business out of trading in and out of mutual funds to make
quick profits at the expense of long-term shareholders and on behalf of sophisticated clients, primarily large hedge funds. 
 8. The former
registered agent further indicated that trades and exchanges were routinely placed by these PSI registered agents on a daily basis between 3:30 and 4:00 p.m. 
 9. The trading volume was so excessive that certain PSI operations employees were instructed to only work on putting these trades through. 
 10. The former registered agent also alleged that the market timers in the PSI Boston office were given preferential treatment including, re-assigned accounts, assistants and bonuses. 
  

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 11. Furthermore, the former registered agent alleged that PSI management was not concerned with
eliminating market timing at the Boston branch because of the revenue it generated. 
 12. Based on this initial information and evidence
obtained by the Division regarding PSI’s Boston branch, on September 3, 2003 the Division forwarded PSI a subpoena duces tecum for records and authorized a formal investigation into PSI to determine whether certain business practices had
violated provisions of the Act. 
 13. Beginning in at least September 1999 and continuing through at least June 2003 (“Relevant Time
Period”), the Division uncovered that certain PSI Boston registered agents used deceptive trading practices to conceal their identities, and those of their customers, to evade mutual funds’ prospectus limitations on market timing.

 IV. STATEMENTS OF FACT 
 A.
PSI’s Knowledge of the Disruptive Impact of Market Timing 
 14. Prior to 1998, PSI did not have a formal market timing policy.

 15. PSI understood that market timing and excessive short-term trading could make it difficult for fund managers to implement investment
strategies. 
 16. In 1999, PSI registered agents were prohibited from market timing activity within the PruChoice product that PSI offered.

 17. The market timing prohibition applied to all wrap fee programs and defined market timing to include more than one trade per quarter or
more than four trades per year. 
 18. All large purchases and redemptions within the PruChoice product were carefully scrutinized by PSI,
and the Druffner Group’s market timing accounts within the wrap products were terminated. 
  

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 19. The policy did not apply to non-proprietary mutual funds unless they were purchased and sold in a
wrap fee program. 
 B. PSI’s Obligations to Mutual Fund Companies 
 20. PSI settled its trades through the National Securities Clearing Corporation’s Fund/SERV system (“Fund/SERV”). 
 21. The degree of information that a mutual fund company received from PSI varied depending on the “networking level” chosen by PSI. 
 22. The information provided via Fund/SERV generally included, among other things, a financial adviser number identifying the registered agent(s)
(“FA number”), the registered agent(s) name, the client’s account number, and the client’s name. 
 23. During the
Relevant Time Period, certain mutual fund companies regularly sought PSI’s assistance to stop registered agents from market timing using, in part, the information received via Fund/SERV to identify the registered agent and/or client.

 24. The mutual fund companies would submit written requests to PSI directing that a registered agent be stopped by either identifying the
registered agent(s) by name or FA number, or by identifying the client by name or account number. 
 C. PSI’s
Failure to Supervise the Boston Branch 
 25. Mutual fund companies identified registered agents within PSI, and specifically the Boston
branch, as known market timers. 
 26. Mutual fund companies sent PSI numerous letters and e-mails advising that they would block certain
registered agents from trading shares of mutual funds due to market timing activity or requesting PSI’s assistance in blocking such activity. 
 27. Despite these warning and/or termination letters, PSI registered agents, specifically members of the Druffner Group, engaged in a deceptive scheme and course of business to expand their hedge fund clients’ timing capacity in
various mutual funds. 
  

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 28. The Division has evidence that the Druffner Group acquired additional FA numbers, obtained multiple
account numbers, utilized different tax identification numbers, and journaled money from one account to another in order to circumvent the mutual funds’ market timing defenses. 
 29. PSI branch management had the capability to stop the market timing activities of the Druffner Group, but failed to take the necessary action to
adequately supervise the registered agents. 
 D. Failure to Prevent the Issuance of New FA numbers for the Purpose of Market Timing 
 30. Once a mutual fund company blocked a registered agent by FA number for market timing, one way to avoid the block was to trade with a different FA
number. 
 31. Because mutual fund companies were trying to block the market timing trades of the Druffner Group, as identified by their FA
numbers, the Druffner Group obtained multiple FA numbers to avoid detection. 
 32. Prior to June 2002, the Druffner Group could obtain new
FA numbers by making an oral request to a PSI branch manager, administrative manager or directly to the commissions department. 
 33. Boston
branch manager(s) approved and delegated approval for the issuance of new FA numbers for the Druffner Group. 
 34. In addition to individual
FA numbers, all three members of the Druffner Group were issued a “Joint” FA number and used these “Joint” FA numbers to execute trades and avoid detection. 
  

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 35. All three individual members of the Druffner Group were issued an “Also” FA number and used
these “Also” FA numbers to execute trades and avoid detection. 
 36. On June 21, 2002, PSI issued a new policy for obtaining
additional FA numbers, Joint FA numbers and “Also” FA numbers. 
 37. PSI required a “FA Production Number Request/Change
Form” to be completed and a business rationale given for such a request. 
 38. The request for an additional FA number required
approval from both the branch manager and the regional business manager. 
 39. Even after the new 2002 policy, the Boston branch manager
approved and delegated approval for the issuance of new FA numbers for members of the Druffner Group. 
 40. The Division has evidence that
the Druffner Group sought to obtain these additional FA numbers as a tool to conceal their identities as market timers. 
 41. The Druffner
Group continued to obtain additional FA numbers by alleging that the new numbers were needed for commission splits. 
 42. However, at all
times the overall commission split for the Druffner Group remained: Druffner 70%, Ficken 20% and Ajro 10% regardless of which FA number the group utilized for an account, an individual trade or an exchange. 
 43. The Druffner Group created their own pool of FA numbers with which to trade in direct violation and avoidance of the PSI policy that was intended to
eliminate the use of multiple FA numbers to evade the mutual funds’ market timing police. 
 44. The Boston branch manager knew, or
should have known, that the Druffner Group’s purpose for requesting new FA numbers was to further the market timing activity. 
  

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 45. PSI did not make inquiries either during branch audits or at any other time as to the issuance of
multiple FA numbers such as: the Ajro/Druffner number, the Druffner/Ajro number, the Druffner/Ficken number, the Ficken/Druffner number, the Ajro/Ficken number, the Ficken/Ajro number, the Druffner/Ficken/Ajro group number, the Druffner
“Also” number, the Ficken “Also” number, or the Ajro “Also” number. 
 46. Moreover, PSI made no formal
compliance inquiry into these matters and failed to prevent the Druffner Group from trading in violation of the trading limitations imposed by the mutual fund companies. 
 E. Failure to Prevent the Use of Different Branch Prefixes for the Purpose of Market Timing 
 47. The
primary account prefixes at PSI’s Boston branch were OBB and 041. 
 48. Many mutual fund companies would initially only block the OBB
and 041 prefixes associated with the Boston branch and the Druffner Group’s FA numbers. 
 49. The Druffner Group requested that their
market timing clients’ accounts be established with different branch prefixes (other than the Boston branch’s primary prefixes), such as ERS, TMT, TMU, BTL, and ERE, to effectively expand the number of FA numbers at their disposal.

 50. The use of branch prefixes other than OBB and 041 allowed the Druffner Group to multiply the number of available FA numbers and
continue excessive short-term trading. 
 51. PSI received numerous market timing warning and termination letters from mutual fund companies
identifying many of the multiple combinations of FA numbers associated with different branch prefixes utilized by the Druffner Group. 
 52.
These communications expressed frustration with PSI registered agents for obtaining multiple FA numbers and the failure of PSI to curtail this activity. 
  

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 53. PSI branch management was aware that the Druffner Group’s multiple FA numbers were used to
circumvent mutual funds’ market timing restrictions. 
 54. Through the use of the multiple FA numbers, the Druffner Group was able to
continue to engage in the market timing activity that the mutual fund companies sought to block. 
 55. Although certain mutual fund
companies communicated their knowledge of the Druffner Group’s tactics to PSI, no formal compliance inquiry resulted. 
 56. The failure
of PSI to take effective action after notification by mutual fund companies allowed the Druffner Group to continue violating mutual fund policies and procedures regarding market timing. 
 F. Failure to Prevent the Opening of New Accounts for the Purpose of Market Timing  
 57. If a mutual
fund company blocked trading privileges by account number rather than FA number, the Druffner Group often set up new account numbers, journaled money to the new accounts and continued to execute market timing transactions within the new accounts
until blocked. 
 58. The Druffner Group opened new accounts on a regular basis for hedge fund clients. 
 59. For example, one hedge fund client had approximately 80 different accounts opened by the Druffner Group. 
 60. The Division has evidence that most of these different accounts were established for the purpose of avoiding detection by mutual fund companies and
continuing the market timing activity. 
  

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 61. Maintaining a large number of accounts gave the Druffner Group the ability to trade after a mutual
fund company blocked a particular account number for market timing activity. 
 62. The opening of new offshore and international hedge fund
accounts required multiple approvals from PSI departments above the branch manager. 
 63. Regional and branch manager personnel did not
question the Druffner Group as to the business rationale for opening so many accounts on behalf of one client, particularly in light of mutual fund companies’ warning and/or termination letters repeatedly shutting down account numbers
previously opened. 
 64. In order to avoid suspicion, both internally at PSI and with the mutual funds’ market timing police, the
Druffner Group advised clients to establish new accounts in a different name and, to the extent possible, utilize a different tax identification number for the new accounts. 
 65. This tactic served to prevent all the accounts from being identified as belonging to the same client, thereby hindering the mutual fund companies
from successfully blocking the trading by the client name or a particular tax identification number. 
 66. While branch management continued
to approve multiple account numbers for the Druffner Group, PSI continued to receive numerous warning or block letters from mutual fund companies specifically identifying the use of multiple account numbers by the Druffner Group’s clients.

  

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 G. Failure to Detect and Prevent the Journaling of Money Between Accounts 
 67. When a mutual fund company blocked one account, the Druffner Group would often journal the client’s money to another account to avoid detection
by the market timing police and continue trading, at all times, despite notice from the mutual fund company to stop. 
 68. Boston branch
managers routinely approved the journaling of money between client accounts for the Druffner Group, failing to recognize that the purpose of each request was to fund new accounts in order to avoid detection by the mutual fund market timing police.

 69. PSI branch management knew that multiple account numbers were established for each of the Druffner Group’s hedge fund clients
engaged in market timing and did not make a reasonable inquiry into the frequent journaling of money between those accounts. 
 H. Failure to Prevent
Multiple Accounts Established Under Client Tax Identification Numbers 
 70. The Division has evidence that the Druffner Group recommended
that hedge fund clients utilize different tax identification numbers and establish different account registrations in order to circumvent market timing restrictions. 
 71. The Druffner Group established multiple accounts for one client and, even though the accounts had the same tax identification number, each account would have a different account registration. 
 72. For example, a hedge fund client of the Druffner Group had one of its tax identification numbers associated with three different accounts, each with
a different registration. 
 73. The Division has evidence that the Druffner Group facilitated the establishment of different account
registrations utilizing the same or different tax identification numbers in order to circumvent market timing restrictions. 
  

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 74. This served to prevent all the accounts from being identified as belonging to the same client,
thereby hindering the mutual fund companies from successfully blocking the trading activity by the client. 
 75. PSI branch management
failed to recognize that the Druffner Group was manipulating registrations to further the market timing activity. 
 76. Mutual fund
companies made PSI aware that registered agents were engaged in this practice, yet PSI took no effective measures to stop it. 
 I. Failure to Detect and
Prevent Trading Below Thresholds 
 77. While market timing can occur in any mutual fund, attention is drawn to a fund that experiences
large and frequent transactions. 
 78. As a result, the Division has evidence that mutual fund companies established various thresholds for
trades, which were dependent on the nature and size of a fund. 
 79. The mutual fund companies viewed trading at or above these thresholds
as a “trigger” to identify potential market timing activity. 
 80. PSI branch management failed to detect a pattern by the
Druffner Group of journaling money between multiple accounts of the same client in order to split transactions into dollar amounts that would fall below the mutual fund companies’ thresholds. 
 81. PSI branch management failed to identify a pattern employed by the Druffner Group to place multiple trades for one client below certain thresholds to
avoid detection. 
 J. PSI’s Market Timing Policies 
 82. On November 15, 2000 PSI registered agents received a memo titled “New Policy on Market Timing Based Trading for Prudential Mutual Funds.” Market timing in wrap products was defined to be more than
one round trip per quarter or more than four round trips per year. 
  

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 83. According to the new 2000 PSI policy, market timing was prohibited in PruChoice, Target and Strategic
Partners funds and stated: “We will continue to monitor excessive trading activity and may refuse purchase orders or exchanges into our Funds if any person, group or commonly controlled account as described in our Fund prospectuses.”

 84. On January 8, 2003, PSI issued a market timing policy stressing “inappropriate timing activities will continue to be
monitored by the product manufacturer.” (emphasis in the original) 
 85. PSI will comply with the manufacturer’s restriction
requests and such restrictions “will be applied to all associated FA numbers, including joint and also numbers.” (emphasis in the original) 
 86. The January 2003 market timing policy also stated clearly: 
  

	 	i.	Cases involving multiple or subsequent notices, or attempted or actual circumventions of this policy will be reviewed by Law, Compliance and Risk Management for determination of
appropriate disciplinary action(s). This includes any attempts to circumvent this policy through the use of manipulative techniques designed to avoid detection of certain trading activity by product manufacturers. For example, executing
transactions through an “also” number or joint production number in order to conceal the identity of the Financial Advisor, or opening new accounts to conceal the identity of the client. Under any of these circumstances Financial
Advisors will be subjected to disciplinary action(s) including, but not limited to, the following: 

  

	 	•	 	Commission forfeiture, 

  

	 	•	 	Issuance of a Memo of Education, 

  

	 	•	 	Issuance of a Memo of Caution, 

  

	 	•	 	Issuance of a Compliance Directive, and/or 

  

	 	•	 	Termination of Employment. 

 (emphasis in
the original) 
  

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 K. PSI Failed Effectively to Implement Policy Change 
 87. Notwithstanding the 2003 market timing policy, members of PSI’s mutual fund exchange desk were given no formal compliance training with respect
to this or any other market timing policy. 
 88. The 2003 market timing policy was a continuation of PSI’s existing procedure regarding
mutual fund companies’ requests to block market timing by registered agent FA number and/or by client account number. 
 89. PSI took
the position that the duty of monitoring detection of market timing activities was the responsibility of the mutual fund companies in which the transactions occurred. 
 90. Certain of PSI branch management continued to approve additional FA numbers, new accounts for existing market timing clients, and the journaling of money between market timing accounts for the registered agents
engaged in market timing activity. 
 91. At no time were any members of the Druffner Group, or any other PSI registered agents, subjected to
any of the disciplinary actions set out in the 2003 policy. 
 92. The Division has evidence that the Druffner Group continued to engage in
the acts and practices integral to their market timing strategy, yet prohibited by the 2003 policy. 
 93. PSI failed to implement an
effective compliance inquiry into the acts and practices exhibited by the Druffner Group and failed to meaningfully implement the new market timing policy. 
 L. Failure to Supervise Market Timing Activity 
 94. PSI branch management is responsible for the conduct of its registered
agents at the Boston branch and the supervision of the registered agents within that office. 
 95. Branch managers, regional business
managers, risk and compliance personnel were made aware of the market timing practices by the Druffner Group. 
  

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 96. While PSI implemented policies during the relevant time period, PSI branch management failed to
effectively stop the market timing practices of the Druffner Group. 
 97. PSI branch management approved the Druffner Group’s requests
for additional FA numbers, new account numbers, and the journaling of money that furthered the scheme by the registered agents to continue market timing. 
 98. As a result, Druffner became the largest producer at the Boston branch and one of PSI’s highest producing registered agents. 
 99. PSI branch management failed to prevent the Druffner Group from utilizing tactics such as those noted above, which allowed them to obscure their identities and conceal the identities of their clients. 

100. PSI’s branch management failed to make reasonable inquiries in response to red flags and consequently failed to take corrective action
allowing the clients of the Druffner Group to continue their market timing activity, which profited both the Druffner Group and PSI. 
 V.
VIOLATIONS OF LAW 
 A. Count I: Violations of § 101 
 1. Section 101 of the Act states: 
 It is unlawful for any person, in connection with the offer, sale,
or purchase of any security, directly or indirectly 
 (1) to employ any device, scheme, or artifice to defraud; 
 (2) 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 are made, not misleading, or 
 (3) to engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any person. 
  

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 2. Respondent violated Section 101 of the Act because PSI knowingly failed to detect the fraudulent
scheme that Boston branch registered agents were engaged in to circumvent market timing controls for the benefit of the company and to the detriment of long-term shareholders. 
 3. The Respondent’s conduct as described above shows that the Respondent failed to reasonably supervise its registered agents and employees to
assure compliance with this chapter. 
 B. Count II: Violations of § 204(a)(2)(G) 
 1. Section 204(a)(2)(G) of the Act states: 
 (a) The secretary may by order impose an administrative fine or censure or deny, suspend, or revoke any registration or take any other appropriate action if he finds (1) that the order is in the public interest and (2) that the
applicant or registrant or, in the case of a broker-dealer or investment adviser, any partner, officer, or director, any person occupying a similar status or performing similar functions, or any person directly or indirectly controlling the
broker-dealer or investment adviser:— 
 (G) has engaged in any unethical or dishonest conduct or practices in the securities,
commodities or insurance business; 
 2. Respondent violated Section 204(a)(2)(G) of the Act because it failed to reasonably supervise
its registered agents and employees thereby engaging in unethical and dishonest practices in the securities business. 
 C. Count III: Violations of
§ 204(a)(2)(J) 
 1. Section 204(a)(2)(J)of the Act states: 
 The secretary may by order deny, suspend, or revoke any registration if he finds (1) that the order is in the public interest and (2) that the
applicant or registrant 
 (J) has failed reasonably to supervise agents, investment adviser representatives or other employees to assure
compliance with this chapter;... 
  

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 2. Respondent violated Section 204(a)(2)(J) of the Act because PSI failed to reasonably supervise
the Druffner Group and failing to prevent its registered agents from utilizing tactics to obscure their identities and conceal the identities of their clients, which furthered the fraudulent market timing scheme. 
 D. Count IV: Violations of 950 CMR § 12.204(1)(a)(28) 
 1. 950 CMR § 12.204(1)(a)(28) states in pertinent part: 
 (1) Dishonest and unethical practices in the securities
business. 
 (a) Broker-dealers. Each broker-dealer shall observe high standards of commercial honor and just and equitable
principles of trade in the conduct of its business. Acts and practices, including, but not limited to the following, are considered contrary to such standards and constitute dishonest or unethical practices which are grounds for imposition of an
administrative fine, censure, denial, suspension or revocation of a registration, or such other appropriate action: 
 28. Failing to comply
with any applicable provision of the NASD Rules of Fair Practice or any applicable fair practice or ethical standard promulgated by the SEC or by a self-regulatory organization approved by the SEC. 
 2. NASD Conduct Rule 2110 provides: 
 A
member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade. 
 3.
IM-2310-2. Fair Dealing with Customers provides a guide describing some practices that violate the “responsibility for fair dealing” including among other things: 
 (3) Trading in Mutual Fund Shares 
 Trading
in mutual fund shares, particularly on a short-term basis. It is clear that normally these securities are not proper trading vehicles and such activity on its face may raise the question of Rule violation. 
 4. NASD Conduct Rule 3010 provides in pertinent part: 
 Each member shall establish and maintain a system to supervise the activities of each registered agent and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with
applicable NASD Rules. Final responsibility for proper supervision shall rest with the member. 
  

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 5. The Respondent violated NASD Rule 2110 and 950 CMR § 12.204(1)(a)(28) by failing to effectively
prevent the fraudulent tactics utilized by the Druffner Group in furtherance of the market timing scheme. 
 6. The Respondent violated NASD
Rule 3010 and 950 CMR § 12.204(1)(a)(28) by failing to detect and prevent the Druffner Group from engaging in a fraudulent scheme to market time; failing to have written supervisory procedures that adequately assured compliance with federal and
state securities laws; failing to meaningfully enforce existing supervisory policies and procedures; and by failing to take reasonable corrective action in response to repeated warnings by mutual fund companies. 
 7. Accordingly, by failing to comply with 950 CMR § 12.204(a)(28) and the provisions of the NASD Conduct Rules, Respondent engaged in unethical or
dishonest practices in the securities business. 
 E. Count V: Violations of 950 CMR §12.203(3)(a) 
 1. 950 CMR § 12.203(3)(a) states in pertinent part: 
 Each broker-dealer must comply with the supervision requirements set forth in the NASD’s Rules of Fair Practice. 
 2. The Respondent violated NASD Rule 3010 and 950 CMR § 12. 12.203(3)(a) by failing to detect and prevent the Druffner Group from engaging in a fraudulent scheme to market time; failing to have written
supervisory procedures that adequately assured compliance with federal and state securities laws; failing to meaningfully enforce existing supervisory policies and procedures; and by failing to take reasonable corrective action in response to mutual
fund company repeated warnings. 
  

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 VI. ORDER 
 THEREFORE, it is hereby ORDERED, by Consent, as follows: 
  

	 	A.	The Respondent shall permanently cease and desist from violations of the Act. 

  

	 	B.	The Respondent shall pay an administrative fine in the amount of $5 million dollars. This sum shall be (1) paid within 10 business days of signing the Offer and deposited upon
execution of the Division’s Order by the Hearing Officer; (2) made by United States postal money order, certified check, bank cashier check, bank money order or wire transfer; and (3) made payable to the Commonwealth of Massachusetts.

  

	 	C.	The Respondent shall not seek or accept, directly or indirectly, reimbursement or indemnification, including, but not limited to any payments made pursuant to any insurance policy,
with regard to all amounts that Respondent shall pay to the Division. Respondent further agrees that it shall not claim, assert, or apply for tax deduction or tax credit with regard to any state, federal or local tax for any penalty amounts that
Respondent shall pay pursuant to the Division’s administrative fine. 

  

	 	D.	The Respondent shall, in addition to the payment of an administrative fine called for in Section (b) herein, pay disgorgement in the amount of $270 million dollars as part of a
joint administrative settlement with the SEC and other civil regulators. 

  

	 	E.	The Respondent shall retain an independent distribution consultant (“Independent Distribution Consultant”), within 60 days of the entry of the final order of the SEC
(“SEC Order”), acceptable to the staff of the SEC and the Division. The Independent Distribution Consultant will develop a distribution plan (“Distribution Plan”) to distribute fairly and proportionately the total disgorgement
outlined in Section (d) above and Section IV.B. of the SEC Order dated August 28, 2006. 

  

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	 	F.	Respondent shall be responsible for all costs and expenses associated with the development and implementation of the Distribution Plan for the distribution of the disgorgement
ordered in Section (d) above and Section IV.B. of the SEC Order. 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 Internal
Revenue Service 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 a Qualified Settlement Fund (as defined by 26 C.F.R. §1.468B-1(c)) upon notice from the tax administrator concerning the amount and the
deadline for payment. 

  

	 	G.	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. 

  

	 	H.	The Independent Distribution Consultant shall develop a proposed Distribution Plan for the distribution of disgorgement as specified above in Section (d) above and Section
IV.B. of the SEC Order, and any interest or earnings thereon, according to a methodology developed in consultation with and acceptable to the staff of the SEC and the Division. 

  

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	 	I.	The Division does not object to the proposed procedural deadlines established by the SEC for the Independent Distribution Consultant to develop a proposed Distribution Plan for the
distribution of the disgorgement amount as specified in the SEC Order to perform this analysis. For good cause shown, the staff of the SEC and the Division may alter any of the procedural deadlines set forth in the SEC Order.

  

	 	J.	Any proposed Distribution Plan developed by the Independent Distribution Consultant pursuant to Section (d) above and the SEC Order shall be submitted simultaneously to the
staff of the SEC and the Division. 

  

	 	K.	The Independent Distribution Consultant shall submit to Respondent, the staff of the SEC and the Division the proposed Distribution Plan no more than 180 days after the entry of the
Order. 

  

	 	L.	The proposed Distribution Plan developed by the Independent Distribution Consultant shall be binding unless, within 210 days after the date of entry of the SEC Order, Respondent,
the staff of the SEC, or the Division advises, in writing, the Independent Distribution Consultant of any determination or calculation from the Distribution Plan that it considers to be inappropriate and states in writing the reasons for considering
such determination or calculation inappropriate. 

  

	 	M.	With respect to any calculation with which Respondent, the staff of the SEC, or the Division do not agree, such parties shall attempt in good faith to reach an agreement within 240
days of the entry of the SEC Order. In the event that Respondent, the staff of the SEC, and the Division 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. 

  

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	 	N.	Within 285 days of the date of entry of the SEC Order, the Independent Distribution Consultant shall submit the proposed Distribution Plan for the administration and distribution of
disgorgement funds pursuant to the SEC’s Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. § 201.1101, et seq., (Rule 1101 through Rule 1106). Following an SEC Order approving a final plan of distribution as provided in Rule 1104
(17 C.F.R. § 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. 

  

	 	O.	 For the period of 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 SEC Order, or of which he/she is a member, and any person engaged to assist the Independent Distribution Consultant in the performance of his/her duties
under the SEC Order, shall not, without prior written consent of the SEC and the Division, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Respondent, or any of 

  

 22 

	 	 
Respondent’s present or 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. 

  

	 	P.	This Order is not intended by the Massachusetts Securities Division to subject any Covered Person to any disqualifications under the laws of any state, the District of Columbia or
Puerto Rico (collectively, “State”), including, without limitation, any disqualifications from relying upon the State registration exemptions or State safe harbor provisions. “Covered Person” means Respondent, or any of its
officers, directors, affiliates, current or former employees, or other persons that would otherwise be disqualified as a result of the Orders (as defined below.). 

  

	 	Q.	The SEC Final Judgment, the NYSE Stipulation and Consent, the NASD Letter of Acceptance, Waiver and Consent, this Order and the order of any other State in related proceedings
against Respondent (collectively, the “Orders”) shall not disqualify any Covered Person from any business that they otherwise are qualified, licensed or permitted to perform under the applicable law of the Commonwealth of Massachusetts and
any disqualifications from relying upon this state’s registration exemptions or safe harbor provisions that arise from the Orders are hereby waived. 

  

	 	R.	The Orders shall not disqualify Respondent from any business that they otherwise are qualified or licensed to perform under applicable state law. 

  

	 	S.	 If after the entry of this Order, the Respondent fails to comply with any of the terms set forth in the Division’s Order, the Enforcement Section may institute
an action to have the Offer of Settlement and this Order declared null and void. 

  

 23 

 
Upon issuance of an appropriate Order and after a fair hearing, the Enforcement Section may re-institute the action that had been brought against the
Respondent. 
  

			
	WILLIAM FRANCIS GALVIN
	SECRETARY OF THE COMMONWEALTH
		
	By:	 	 /s/ Diane Young-Spitzer

		 	Diane Young-Spitzer
		 	Presiding Officer
		 	Massachusetts Securities Division
		 	One Ashburton Place, 17th Floor
		 	Boston, Massachusetts 02111

 Issued: August 28, 2006 
  

 24Order Instituting Administrative Proceedings, dated August 28, 2006

 Exhibit 10.3 
 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 SECURITIES EXCHANGE ACT OF 1934 
 Release No. 54371/August 28, 2006 
 ADMINISTRATIVE PROCEEDING

 File No. 3-12400 
  

			
	 In the Matter of
  
 PRUDENTIAL EQUITY GROUP,
 LLC, formerly known as
 PRUDENTIAL SECURITIES, INC.,
  
 Respondent.
	  	  
 ORDER INSTITUTING ADMINISTRATIVE
 PROCEEDINGS, MAKING FINDINGS, AND
 IMPOSING REMEDIAL SANCTIONS
PURSUANT
 TO SECTION 15(b) OF THE SECURITIES
 EXCHANGE ACT OF 1934

 I. 
 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 15(b) of
the Securities Exchange Act of 1934 (“Exchange Act”) against Prudential Equity Group, LLC, formerly known as Prudential Securities Inc. (“Respondent”). 
 II. 
 In anticipation of the institution of these proceedings, Respondent has submitted an Offer of
Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without
admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative Proceedings, Making Findings,
and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (the “Order”), as set forth below. 

 III. 
 On the basis of this Order and Respondent’s Offer, the Commission finds1 that:

 A. Respondent 
 1. Prior to
July 1, 2003, Prudential Securities Inc. (“PSI”) was an indirect wholly owned broker-dealer subsidiary of 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. 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. 
 B. Summary 
 2. This matter concerns a fraudulent market timing scheme perpetrated by PSI registered representatives (collectively, the “Representatives”) 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 Representatives 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 Representatives’ 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 Representatives’ splitting of one trade into numerous smaller ones to avoid detection by mutual funds. 
  

	1	The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

  

 2 

 3. As early as the fourth quarter 1999, several mutual fund companies identified the
Representatives’ use of deceptive trading practices and notified PSI of the Representatives’ conduct. In May 2002, PSI itself determined that its top-producing registered representative 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 Representatives’ conduct and asked the firm to take steps to curtail their deceptive market timing practices.

 4. Despite PSI’s increasing awareness of the Representatives’ fraudulent market timing practices, the firm elected to continue
the business of market timing. Rather than discipline or sanction any of the Representatives 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 Representatives’ gross revenues. In 2001, for example, the Representatives 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 Representatives generated approximately $23 million in gross commission revenues in 2002, and continued to generate comparable revenues throughout the Relevant Period. 
 5. PSI’s policies and procedures were ineffective in curtailing the Representatives’ 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 registered representatives. Additionally, PSI repeatedly failed to deprive the Representatives of their
inappropriate use of hundreds of FA numbers, even though the use of multiple FA numbers was the primary means by which the Representatives 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 Representatives’ scheme. PSI also failed to make and keep required records concerning the Representatives’ trading practices. As a result of the conduct described above, PSI violated the
antifraud and books and records provisions of the federal securities laws. 
 C. Background 
 6. 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. 
 7. Beginning in the late 1990s, many mutual funds determined that market timing 

  

 3 

 
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. 
 8. 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 Representatives, PSI, and virtually all mutual fund companies. To place trades that were transmitted through NSCC, the Representatives were required to
identify their FA number and a customer account to mutual funds on trade tickets. PSI appended additional information to the Representatives’ orders and transmitted the transactions through NSCC to the mutual fund companies. 
 9. Some mutual funds screened for excessive short-term trading by reviewing FA and customer account numbers that the Representatives 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.1 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 registered representative 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 registered representative’s or customer’s transaction and often asked PSI to take steps to preclude a particular registered representative or customer account from engaging in additional trades in a particular fund
or fund family. 
 10. Because these mutual funds monitored for excessive trading by FA number and/or customer account number, the
Representatives altered their use of these numbers to defraud these funds and the funds’ long-term shareholders. By altering their use of these numbers, the Representatives tricked mutual fund companies into accepting trades that the funds
otherwise would have rejected. 
 D. The Representatives’ Deceptive Conduct 
 11. During the Relevant Period, the Representatives engaged in a fraudulent scheme to circumvent blocks imposed by mutual funds on their trading
privileges. The Representatives’ scheme worked as follows. The Representatives’ customers, typically hedge funds, asked the Representatives to purchase and sell mutual funds on a short-term basis on their behalf. The 
  

	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. 

  

 4 

 Representatives, 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. 
 12. The Representatives, 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
Representatives then used other FA numbers and customer accounts that had not yet been blocked to evade the funds’ restrictions and continue to trade. 
 a. The Boston Registered Representatives 
 13. For example, one group of PSI registered
representatives based in its Boston, Massachusetts branch office (the “Boston Representatives”) repeatedly used these deceptive practices to defraud mutual funds throughout the Relevant Period. The Boston Representatives consisted of a
group of three PSI registered representatives and several 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 Representatives’ 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. 
 14. Many of the mutual funds in which the Boston Representatives 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 Representatives from further trading
while others asked that PSI take steps to block further trades by the group in the fund. 
 15. During the Relevant Period, the Boston
Representatives 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 Representatives’ 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. Their scheme created the impression that transactions originated from many registered
representatives and represented many different customers. In fact, what appeared to the mutual funds to be thousands of separate transactions submitted by many registered representatives for many unrelated customers was actually a systematic pattern
of market timing by group members on behalf of their five hedge fund customers. 
  

 5 

 b. The Garden City Representative 
 16. Another PSI registered representative based in its Liberty Plaza and Garden City, New York branch offices (the “Garden City Representative”)
used these same deceptive practices to defraud mutual funds throughout the Relevant Period. The Garden City Representative headed a team of registered representatives and 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 Representative’s market timing
activities (of which the Garden City Representative received approximately $4.7 million). The Garden City Representative was the top producing registered representative at PSI throughout the Relevant Period. 
 17. Like the Boston Representatives, the Garden City Representative traded in mutual funds that screened for market timing by FA and customer account
numbers. During the Relevant Period, approximately fifty mutual funds complained to PSI about the Garden City Representative’s trading activity. Many mutual funds specifically identified to PSI his use of deceptive trading strategies to evade
blocks the fund companies had imposed. 
 18. To evade these blocks, the Garden City Representative 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 registered representatives and many customers. By shifting
trades from one FA number to another, or from one customer account to another, the Garden City Representative 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. 
 c. The Special Accounts Representatives 
 19. Another group of PSI registered representatives based in a New York office known within the firm as “Special Accounts” (the “Special Accounts Representatives”) also used deceptive practices to
defraud mutual funds throughout the Relevant Period. The Special Accounts Representatives consisted of a group of two PSI registered representatives and several assistants. The group had three customers for which it placed market timing trades.
During the Relevant Period, PSI received gross revenue of approximately $6.5 million from the Special Accounts Representatives’ 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 registered representative within the firm. 
 20. Like the Boston Representatives and the Garden City Representative, the Special Accounts Representatives knew that most mutual funds identified
excessive trading by FA and customer account numbers. They also understood that mutual funds screened for market timing by reviewing only those trades at or exceeding certain dollar amounts. The Special Accounts 

  

 6 

 
Representatives 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 Representatives also used “under the radar” trading to disguise their customers’ trading in funds that previously had taken steps to stop them. The Special Accounts Representatives’ use of these
devices in connection with market timing deceived mutual funds into accepting trades they otherwise would have rejected. Like the Boston Representatives and the Garden City Representative, their scheme perpetuated the impression that transactions
originated from many registered representatives and represented many different customers. 
 E. PSI Failed to Prevent the Representatives From Obtaining
Multiple Broker Identifying and Customer Account Numbers 
 21. PSI failed to prevent the Representatives from obtaining several different
forms of broker identifying numbers. Consequently, the Representatives used these numbers to perpetrate their scheme to defraud. When registered representatives began their employment with PSI, PSI assigned them an FA number. Registered
representatives used FA numbers to open customer accounts, execute trades, and track their commissions. When registered representatives worked as a team to service common customers, PSI provided “Joint” numbers. Joint numbers ostensibly
represented a commission split between two or more registered representatives. Here, the Representatives acquired and used Joint numbers for improper purposes. The numbers were not used to split commissions, but rather to facilitate the
Representatives’ ability to trade after their other broker identifying numbers had been blocked from trading. PSI also provided the Representatives with “Also” numbers. The purported purpose of “Also” numbers was to allow
the Representatives’ customers to access only those portions of a given registered representative’s portfolio that belonged to that customer or to provide certain customers with commission discounts. The Representatives, 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
Representatives that it threatened to curtail the trading privileges of all registered representatives within a PSI branch to remedy the conduct. 
 22. Each of the Representatives maintained numerous FA, Joint, and Also numbers, and used these numbers interchangeably to execute trades for their customers. For example, the Boston Representatives used 13 broker identifying numbers to
place market timing trades and the Garden City Representative used 49 broker identifying numbers. When one of the Representatives’ 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 Representatives split commissions from mutual fund purchases according to a single ratio, irrespective of which
broker identifying number was used to enter the trade. 
 23. PSI failed to prevent the Representatives from opening hundreds of customer
account numbers. The Representatives’ customers maintained multiple accounts with PSI, many 

  

 7 

 
of which bore fictitious names that had no relation to the actual customer’s name. The Representatives used these customer accounts interchangeably to
execute trades. When one customer account was blocked from trading by a particular mutual fund, the Representatives 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. 
 24. PSI failed to prevent the Representatives 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
Representatives used confidential accounts improperly to impede the mutual funds’ ability to identify which PSI registered representative or customer was market timing their funds. 
 25. PSI also failed to prevent the Representatives from obtaining customer account numbers with multiple branch identifiers. Typically, registered
representatives located in one PSI branch office had customer accounts that had a prefix used to identify the branch location. Here, the Representatives 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 registered representative, that was market timing their funds. The Representatives used branch identifiers improperly as another mechanism
to conceal their identities and the identities of their customers to mutual funds. 
 F. PSI Received Notifications of the Representatives’
Deceptions 
 26. During the Relevant Period, mutual fund companies sent more than a thousand letters and e-mails to PSI concerning market
timing by the Representatives. 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 Representatives used deceptive trading practices to
continue placing market timing trades. 
 27. High level officers of PSI were aware during the Relevant Period that mutual funds were
accusing the Representatives of using deceptive practices to evade the mutual funds’ attempts to block the Representatives’ 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 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 Representatives throughout the Relevant Period, but did not take adequate steps to stop the Representatives’ fraud. Among other things, the Senior Officer received the following indications that the Representatives were committing fraud. In
some cases, certain other senior managers or high level officers of PSI also received notices that the Representatives were committing fraud. 
 28. On November 21, 1999, a senior executive in the PSI Mutual Fund Operations 

  

 8 

 
Division forwarded to the Senior Officer a string of e-mails concerning a complaint from a mutual fund complex that the Garden City Representative had evaded
a block on two of his accounts by simply opening new accounts. Among other things, the e-mail stated: 
 It appears that [the Garden City
Representative] 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 e-mail commented, “[T]his seems to be a serious matter that will only get
worse.” 
 29. On January 19, 2000, the manager of PSI’s Mutual Fund Operations Division forwarded to the Senior Officer an
e-mail from another mutual fund complex complaining that a member of the Boston Representatives 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. 
 30. On March 30, 2001, the head of PCG risk management sent the Senior Officer an e-mail that attached a letter from another mutual fund complex complaining that “excessive trading activity” by PSI registered representatives
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 registered representatives 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. 
 31. On June 28, 2001, the Senior Officer received an e-mail from the manager of the
Special Accounts branch warning him that the Special Accounts Representatives 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 

  

 9 

 
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. 
 32. On April 4, 2002, the manager of PSI’s Mutual Funds Operations division sent an e-mail to
other senior managers forwarding an e-mail from another mutual fund complex complaining that certain PSI registered representatives were using multiple accounts and FA numbers to evade restrictions on their market timing. The e-mail 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 e-mail, he showed it to the Senior Officer. The head of PCG risk management also discussed the e-mail with the Senior Officer. 
 33. 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 registered representatives, including multiple accounts
and FA numbers. 
 34. 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 Representative. The employee’s analysis noted that in one 37-day period, the Garden City Representative had 19 different mutual fund companies request that accounts under the
representative’s control, or the representative as an FA, be blocked from their funds. The analysis concluded that the Garden City Representative 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. 
 35. 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 e-mails from another mutual fund complex complaining that certain PSI registered
representatives were using multiple customer accounts and FA numbers for market timing. One of the e-mails 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 

  

 10 

 
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 e-mail 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 Representative and the Boston Representatives]. 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. 
 36. On February 11, 2003, a PCG risk officer sent an e-mail to the Senior
Officer (then the President and most senior officer of PCG) that forwarded an e-mail from the Garden City branch manager about the Garden City Representative’s market timing business. The branch manager questioned the effectiveness of the
Mutual Fund Operations Division’s internal blocking system and raised several other concerns about the Garden City Representative’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 misled as to the identity of the FA’s of record. Recently, [a mutual fund company] was provided with information which was at best misleading to effect the removal [of] a block.

  

 11 

 [T]here is frequent journaling of funds between accounts. 
 At the present time, [the Garden City Representative and an assistant] either have or have had a total of 48 FA #s including single, joint and also
numbers. 
 G. PSI’s Procedures to Limit Market Timing Were Ineffective 
 37. Although PSI senior officers issued policies and procedures ostensibly designed to proscribe the Representatives’ 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
registered representatives. As a result, the Representatives’ deceptions continued even after these policies and procedures were promulgated. 
 a. PSI’s June 2002 Procedure Concerning Issuance of FA Numbers 
 38. In June 2002, PSI instituted a procedure concerning
the issuance of FA numbers, in a purported effort to hinder the Representatives’ 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
Representatives from misusing previously issued Joint and Also numbers to evade blocks imposed by mutual fund companies nor did it preclude them from obtaining new FA numbers to facilitate their fraud. Indeed, the Garden City Representative 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 Representatives to any form
of discipline or sanction if they continued to use Joint and Also numbers to evade blocks in violation of its terms. 
 b. PSI’s
January 2003 Market Timing Policy 
 39. After protracted discussion involving PSI senior officers 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 on the Representatives’ 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. 
  

 12 

 40. Unlike other PSI policies concerning market timing, the Market Timing Policy expressly provided for
the imposition of sanctions, including termination of employment, for the Representatives’ 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 Representatives to stop their use of “manipulative techniques” to market time. 
 41. The Market
Timing Policy also provided that, in the event a mutual fund company asked PSI to block any one of a registered representative’s FA numbers, all numbers belonging to the registered representative 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 Representatives
were able to continue their fraudulent scheme of switching to unblocked FA numbers or customer accounts to evade blocks imposed by mutual fund companies. 
 H. PSI Profited From the Representatives’ Deceptive Acts 
 42. PSI identified the Representatives as early as 2000 and
monitored their revenues and ranks within the firm throughout the Relevant Period. The firm’s Mutual Fund Operations Division, which processed the Representatives’ trades in mutual funds, monitored the Representatives’ 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. 
 43. In 2000, PSI began to track each quarter the gross commission revenues generated by the Representatives. 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 Representatives generated more than $16 million in gross commission revenues for the firm, most of which would
have been eliminated had the firm phased out market timing at that time. Similarly, the Representatives 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. 
 44. As PSI senior officers became increasingly aware of the Representatives’ 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 

  

 13 

 
eradicating the Representatives’ deceptions and the Representatives and their hedge fund customers continued this activity. During the Relevant Period,
the Representatives generated approximately $50 million in gross revenues as a result of this conduct. 
 I. PSI Failed to Make and Keep Required Books
and Records 
 45. PSI was required to make and keep current trade orders and trade tickets concerning the Representatives’ mutual
fund trading. PSI also was required to make and keep current a trade blotter that reflected the Representatives’ mutual fund trading. During the relevant period, PSI failed to maintain these required books and records, and, in instances where
PSI did maintain these items, they did not give the actual time at which the orders were received or the time of entry. 
 J. Violations of the Antifraud
and Books and Records Provisions of the Federal Securities Laws 
 46. As a result of the conduct described above, PSI willfully violated
Section 17(a) of the Securities Act of 1933, which prohibits fraudulent conduct in the offer or sale of securities. 
 47. As a result
of the conduct described above, PSI also willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities. 
 48. PSI also willfully violated Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder. Section 17(a) of the Exchange Act and
Rules 17a-3 and 17a-4 thereunder required PSI to make and keep certain books and records relating to its business, including trade blotters and trade tickets related to mutual fund trading. Implicit in the Commission’s recordkeeping rules is a
requirement that information contained in a required book or record be accurate. 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. 
 K. Undertakings 
 In determining whether to accept the Offer, the Commission has considered these
undertakings: 
 49. Cooperation. Respondent shall cooperate fully with the staff of the Commission in any litigation, ongoing
investigation, or other proceedings relating to or arising from the matters described in the This Order. In connection with such cooperation, Respondent has undertaken: 
  

 14 

	 	a.	to produce promptly, without service of a notice or subpoena, any and all documents and other information requested by the Commission’s staff in Respondent’s possession
and control; 

  

	 	b.	to use its best efforts to cause its employees to be interviewed by the Commission’s staff at such times as the Commission may reasonably request; and 

 

	 	c.	to use its best efforts to cause its employees to appear and testify truthfully and completely without service of a notice or subpoena in such investigations, depositions, hearing
or trials as the Commission’s staff reasonably may request; and that in connection with any testimony of Respondent to be conducted at deposition, hearing, or trial pursuant to a notice or subpoena, Respondent 

  

	 	i.	agrees that any such notice or subpoena for Respondent’s appearance and testimony may be served by regular mail on its attorney: 

 Bingham McCutchen LLP 
 Attn: Neal E.
Sullivan, Esq. 
 2020 K Street, N.W. 
 Washington, DC 20006; and 
  

	 	ii.	Agrees that any such notice or subpoena for Respondent’s appearance and testimony in an action pending in a United States District Court may be served, and may require
testimony, beyond the territorial limits imposed by the Federal Rules of Civil Procedure. 

 50. Independent Distribution
Consultant. Respondent shall retain, within 60 days of the entry of this Order, the services of an independent distribution consultant (“Independent Distribution Consultant”) acceptable to the staff of the Commission. 
 a. Respondent shall be responsible for all costs and expenses associated with the development and implementation of the Distribution Plan for the
distribution of the disgorgement ordered in Section IV.B. of this Order. 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. 
 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. 
  

 15 

 c. The Independent Distribution Consultant shall develop a proposed Distribution Plan for the
distribution of the disgorgement ordered in Section IV.B. of this Order, 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 the staff of the Commission the proposed Distribution Plan no more than 180
days after the entry of this Order. 
 e. The proposed Distribution Plan developed by the Independent Distribution Consultant shall be
binding unless, within 210 days after the date of entry of this Order, Respondent or the staff of the Commission advises, in writing, the Independent Distribution Consultant of any determination or calculation from the Distribution Plan that it
considers to be inappropriate and states in writing the reasons for considering such determination or calculation inappropriate. 
 f. With
respect to any calculation with which Respondent or the staff of the Commission do not agree, such parties shall attempt in good faith to reach an agreement within 240 days of the entry of this Order. In the event that Respondent and the staff of
the Commission 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 the date of entry of this Order, the Independent Distribution Consultant shall submit the proposed Distribution Plan for the
administration and distribution of disgorgement funds pursuant to the Commission’s Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. § 201.1100, et seq., (Rule 1100 through Rule 1106). Following a Commission order approving a
final plan of distribution, as provided in Rule 1104 [17 C.F.R. § 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 this Order, or
of which he/she is a member, and any person engaged to assist the Independent Distribution Consultant in the performance of his/her duties under this Order, shall not, without prior written consent of the staff of the Commission, enter into any
employment, consultant, attorney-client, auditing or other professional relationship with Respondent, or any of Respondent’s present or 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. 
  

 16 

 i. For good cause shown, the staff of the Commission may alter any of the procedural deadlines set forth
above. . 
 IV. 
 In view
of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent’s Offer. 
 Accordingly, pursuant to Section 15(b) of the Exchange Act, it is hereby ORDERED that: 
 A. Respondent is hereby censured.

 B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of $270 million to the Securities and Exchange
Commission. Such payment shall be: (A) made by wire transfer, United States postal money order, certified check, bank cashier’s check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) wired,
hand-delivered, or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies PSI as a
Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter, wire transfer instruction, money order, or check shall be sent to David P. Bergers, District Administrator, Securities and Exchange Commission,
Boston District Office, 33 Arch Street, 23rd Floor, Boston, Massachusetts 02110. 
 C. Respondent shall comply with the undertakings
enumerated in Section III., paragraph 50 of this Order. 
 By the Commission. 
  

	
	Nancy M. Morris
	Secretary

  

 17

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