Originally created 06/16/04

Judge dismisses SEC case against former brokers; SEC to refile



BOSTON -- A judge on Monday dismissed a complaint by federal securities regulators alleging that six former brokers and branch managers at Prudential Securities Inc.'s Boston office were involved in improper trading.

U.S. District Judge Reginald C. Lindsay dismissed the complaint because the Securities and Exchange Commission failed to be specific enough in making its allegations.

Lindsay also gave the SEC 30 days to file an amended complaint, which agency officials said they fully intended to do.

"There was a lack of particularity in regard to the SEC's allegations," said John Sten, who represented defendant Marc J. Bilotti. "When you allege fraud, you have to allege actual facts to support the fraud, and at this stage, the SEC hasn't done that."

The SEC did not see Lindsay's decision as a setback and planned to refile the complaint with more specifics.

The SEC complaint, filed in November, named former brokers Martin J. Druffner, Justin F. Ficken, Skifter Ajro, John S. Peffer and Bilotti and former branch manager Robert Shannon.

The complaint alleged that former brokers took a variety of steps, including using false identities, to disguise market timing to enrich themselves and the hedge funds whose money they were investing.

The defendants "defrauded dozens of mutual funds and their shareholders by misrepresenting their own identities or the identities of their brokerage customers in order to engage in thousands of market timing trades after the mutual funds in question had blocked them or their customers from such trading," the complaint states.

Market timing is quick, in-and-out trading that is restricted by many funds because it tends to skim profits from long-term shareholders. Regulators say funds that allowed selective market timing committed fraud.

"The broker defendants received substantial commissions from their market timing activities. For example, the group headed by Druffner received nearly $5 million in gross commissions in 2002 alone, primarily derived from market timing activities," according to the complaint.

The SEC complaint alleges the brokers violated federal securities law and that Shannon "substantially assisted" the brokers by, among other things, approving market timing trades.

The SEC is seeking injunctive relief, penalties and disgorgement, a request common in such proceedings to refund investors for any lost profits.

Prudential, though not named as a defendant in the SEC complaint, is one of a number of securities companies across the nation to be embroiled in the scandal over mutual fund market timing that has led to criminal charges and millions of dollars in penalties.