Prudential Pact: $110 Million To Settle Suit
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Nearly two years after Prudential Securities agreed to repay every customer it cheated in the biggest investment fraud in history, the firm has been forced to open its wallet again. A Federal judge in Manhattan has granted preliminary approval to a $110 million settlement of a class-action lawsuit that accused Prudential of engaging in a racketeering conspiracy in its fraudulent sale of limited partnerships in the 1980’s, according to court records filed yesterday. The settlement shows that Prudential, despite hopes of putting the partnership scandal behind it, is still haunted by the scandal. The continuing problems come despite its 1993 accord with securities regulators to compensate clients who were defrauded in the partnerships and its agreement last year to accept a form of probation to settle criminal charges. The firm’s total projected cost for the debacle has reached $1.5 billion, executives at the firm said yesterday, making it the costliest scandal in Wall Street’s history. In essence, the $110 million proposal would be used to compensate investors who did not submit a claim to the regulatory compensation fund, or participate in some of the other thousands of pieces of litigation stemming from the partnership fraud. “Prudential is not happy about paying this kind of money out when they thought they had resolved this situation by giving an open pocketbook to the regulators,” said Lawrence A. Sucharow, one of the plaintiffs’ lawyers. “But we will give something to everybody who has not had their claim resolved through that process.” Mr. Sucharow and Joel Bernstein, another lawyer in the class action, estimated that between 80,000 and 100,000 investors never filed claims to the regulatory compensation fund and as a result would qualify for the latest class-action settlement. For many of these people, this settlement will be the last chance to recover any of their losses from the Prudential partnership fraud. Charles Perkins, a Prudential spokesman, said in a statement, “We believe that this is a fair resolution to resolve remaining claims from investors in limited partnerships.” Limited partnerships, which invest in assets like real estate and oil wells, were sold in the 1980’s to investors seeking tax deductions and profits from asset appreciation. The investments were highly risky. But at Prudential, partnerships were sold to almost 340,000 investors, often with little attention to suitability. Many of those sales were achieved though lies and deceptions, often in sales material distributed to brokers by the firm. While investors suffered huge losses, the senior partnership executives with Prudential gained great personal wealth from the sales. Indeed, despite the investor losses, James J. Darr, the former head of the division, continues to be paid millions of dollars by Prudential out of the cash flow of the partnerships, as part of a contract he struck with the firm, court documents show. The class action charged that the firm and its executives engaged in a racketeering conspiracy with the partnership sponsors, known as general partners. The lawsuit contended that the general partners were selected by Prudential not for the quality of their investments, but rather for their willingness to grant favors and investment deals to the firm’s officers. Indeed, throughout the 1980’s, the investor money for the partnerships was used to pay for limousines and fancy parties for company executives, as well as for exotic overseas trips. None of these payments were ever disclosed to investors. By charging racketeering rather than fraud, the plaintiff’s lawyers in the case effectively sidestepped some of the strict statute of limitations requirements that usually apply in securities cases. “This vindicates the concept of using civil racketeering in these cases,” said Clinton Krislov, one of the plaintiffs’ lawyers in the case. The settlement was reached only with Prudential and its former officers. The case against a number of other plaintiffs, including the sponsors of the limited partnerships, remain unresolved More : query.nytimes.com |