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In one of the largest cases ever and the first to include potential criminal charges, state officials from multiple states have announced an agreement to resolve an investigation of market timing by Prudential Equity Group.

The company will pay $270 million in restitution to injured investors. Under a separate agreement with the U.S. Department of Justice, Prudential will pay a penalty of $330 million. The agreements also require the company to undertake a series of reforms.

“We are pleased that Prudential has joined the long list of institutions that have agreed to compensate customers harmed by market timing activity and implement sweeping reforms,” said New York Attorney General Spitzer.

The investigation of Prudential began with a subpoena from the New York Attorney General’s Office in August 2003.

The investigation – conducted in cooperation with the Securities and Exchange Commission, New York Stock Exchange, National Association of Securities Dealers and the states of Massachusetts and New Jersey – revealed that the company’s brokers defrauded at least 50 mutual funds and their investors between September 1999 and June 2003.

Specifically, the brokers provided hedge fund operators and other favored investors with phony customer account numbers that were used to conduct repeated in and out trading of various funds. The scheme helped the favored investors evade the scrutiny of the “timing police” at the mutual fund companies.

Senior managers at Prudential were aware of the fraud. In April 2002, the manager of Prudential’s Mutual Fund Operations Division shared with other senior Prudential managers the following e-mail from another mutual fund family, which complained about Prudential’s brokers:

“What we have seen scares us. It appears certain representatives are changing account registrations, tax id numbers, and branch and rep [ID] numbers in an effort to time the [mutual fund family’s] funds. All of these accounts have been stopped, but each day “new” ones pop up.”

In February 2003 the president of Prudential’s Private Client Group received a copy of an e-mail from the manager of Prudential’s branch office in Garden City expressing concern about the tactics used by Prudential’s top-producing broker to enable a customer to continue market timing at another mutual fund company:

“Fund companies have been misled as to the identity of the [brokers] of record… Recently, [a mutual fund company] was provided with information which was at best misleading to effect the removal [of] a block [from further market timing].”

Between 1999 and 2003, Prudential received more than a thousand letters and e-mails from mutual funds complaining of market timing by Prudential brokers. However, the company did not act to halt the activity, which harmed small investors who typically buy and hold their mutual fund shares.

Posted under Finance

New York Attorney General Eliot Spitzer has sued a company responsible for what is believed to be the largest deliberate breach of privacy in internet history.

The suit against web site operator Gratis Internet alleges that the company sold personal information obtained from millions of consumers under a strict promise of confidentiality.

“Unless checked now, companies that collect and sell information on consumers will continue to find ways to erode the basic standards that protect privacy in the internet age,” Spitzer said.

Spitzer’s office began an investigation of companies involved in “data mining” or compilation and sale of marketing lists, early last year. The focus of the investigation quickly turned to Gratis, a Washington, D.C. -based company that owns and operates several web sites that provide consumers with ways to receive free products, generally through free trials of yet other products. These sites include or have included: FreeiPods.com; FreeCDs.com; FreeDVDs.com and FreeVideoGames.com.

From 2000 through 2004 Gratis made numerous explicit promises to the users of its web sites about protecting personal information. Among the promises the company made were:

“We will never give out, sell or lend your name or information to anyone”;

“We will never lend, sell or give out for any reason your email address or personal information”;

“We at [Gratis web site] respect your privacy and do not sell, rent or loan any personally identifiable information regarding our customers to any third party”; and

“Please note that we do not provide your E-mail address to our business partners.”

Even on its sign-up pages, Gratis promised consumers that it “does not . . . sell/rent emails.”

However, the Attorney General’s investigation confirmed that Gratis’s owners, Peter Martin and Robert Jewell, repeatedly violated these promises during 2004 and 2005 by selling access to lists of millions of Gratis’s customers to three independent email marketers. The marketers then sent hundreds of millions of email solicitations to those users, on behalf of their own customers. In each of these deals, Gratis wrongfully shared between one and seven million confidential user records. This is believed to be the largest deliberate breach of a privacy policy ever discovered by U.S. law enforcement.

Leading privacy advocates praised the lawsuit:

Marc Rotenberg, the Executive Director of the Electronic Privacy Information Center based in Washington D.C. said: “Without strong enforcement, privacy policies are meaningless. We support the efforts of the New York Attorney General to safeguard consumer privacy.”

Beth Givens, Director of the Privacy Rights Clearinghouse, a consumer advocacy organization said: “Attorney General Spitzer continues to send a strong message to Gratis and others like it who would sell their email lists to spammers when their privacy policy says otherwise: Deception doesn’t pay.”

The suit also sets forth how, during the course of its investigation, Gratis repeatedly, but falsely, denied that such data sharing had even occurred. In one written response to the Attorney General, for instance, Gratis assured the Attorney General that “at all times during its existence . . . Gratis has never sold, rented, or lent email addresses or personal information of its users to any third-party and the company has always maintained control over and ownership of such information.”
The Attorney General’s suit cites specific data sharing contracts, as well as testimony and other evidence provided by internet marketers that did business with Gratis. The suit, filed in New York State Supreme Court, seeks penalties and injunctive relief, against Gratis and its principals, under New York’s consumer fraud statutes

The lawsuit follows the Attorney General’s settlement, earlier this month, with e-mail marketer Datran Media, to whom Gratis had sold its user records.

Posted under Customer Service