In the Matter of Prudential Securities, Inc.

Prudential Securities Incorporated (PSI) (defendant) was a registered broker-dealer. For 10 years, PSI’s Direct Investment Group (DIG) structured, promoted, and sold $8 billion in over 700 limited-partnership offerings. DIG’s marketing personnel, who reported to the head of DIG rather than to PSI’s regional directors, prepared promotional materials for brokers to use in selling the offerings. Brokers were neither required nor encouraged to read prospectuses and often misrepresented the investments’ nature, possible yields, liquidity, and risks. DIG promoted the limited partnerships to all customers regardless of suitability. Investors suffered significant losses. Unrelated to DIG, in 1986, the Securities and Exchange Commission (SEC) (plaintiff) issued an order making findings about PSI’s supervisory deficiencies and requiring a consultant to review PSI’s compliance procedures and make recommendations. PSI enhanced its active-account and compliance procedures, but branch-office managers failed to follow the procedures. PSI failed to implement effective procedures to monitor compliance or give the compliance department sufficient enforcement authority. PSI adopted procedures for timely remedying violations identified by audits but did not outline specific corrective steps to be taken or responsibility for correcting deficiencies, require branch-office managers to enhance supervision when deficiencies were identified, or require that active-account deficiencies be remedied retroactively. Registered representatives in nine PSI offices defrauded customers through churning and other schemes. A broker in a Missouri branch office, for example, opened unsuitable margin accounts for widowed, elderly, or retired customers and engaged in unauthorized and excessive trading in speculative stocks in the accounts. These accounts appeared on active-account reports, but the branch-office manager did not contact the customers as required. Sixteen customers at a prior firm filed complaints against the broker, but PSI never enhanced supervision of the broker’s activities. The SEC deemed it appropriate to institute public proceedings, accepted PSI’s settlement offer, made findings, and imposed sanctions.