Wachovia Securities is in the midst of a mini-purge of former Prudential producers, but the move is not your typical post-merger house cleaning.
This one is fueled by the blossoming mutual fund scandals. Specifically, Wachovia is showing to the door former Pru brokers who engaged in mutual fund market timing. Top producers, along with branch managers, have been let go in Boston, New York and Long Island, and more cuts are expected, according to sources close to the situation.
Wachovia's hard-line approach rankles Pru's old workforce mainly because market timing is not illegal, although many view the practice as ethically suspect because it is at odds with the mutual funds' long-term sensibility.
What's unclear is just how deeply Wachovia's cuts will go. Some believe they will ultimately end with higher-level Prudential Securities execs departing the firm.
“Everybody in Prudential knew what was going on,” says one large producer at the firm. Market timing “was a common practice for years.”
In the last several weeks the issue of market timing — arbitrage in mutual funds, usually near the closing bell — became a major issue for the investment industry. Wachovia had an existing policy against market-timing, one that was reiterated in a memo to former Prudential brokers not long after news of an investigation by New York attorney general Elliot Spitzer hit the newsstands.
Prudential, however, did not have a strong policy against it, according to brokers and other sources close to the acquired firm. To some, Wachovia's move to rid itself of those who engaged in it is the equivalent of busting them for drinking whiskey before Prohibition was passed.
Former Pru branch managers reportedly reassigned or forced out include Bobby Shannon in Boston and Marshal Dumont in Garden City, N.Y. (Neither could be reached for comment.) The new managers at those branches are Dennis Schmidt in Boston and Sean Farrell in Garden City, both of whom oversee other offices. A Wachovia spokesman wouldn't comment on specific employee-related issues, but said more generally that the firm's “highest priority” is compliance and investor confidence, and that the firm will “occasionally take action where appropriate.”
“The brokers feel they were doing legit arbitrage,” says a source in contact with the producers who were let go. “If there's a discrepancy between the share price here and foreign shares somewhere else, well, isn't that what a broker is supposed to be doing?”
Though the Spitzer investigations are clearly the touching-off point for the purges, the firings are hardly devoid of intra-firm political implications. Former Pru employees already anxious about the merger's potential impact on them now have something else to worry about from their former employer. Some are jumping before they can be pushed: One recent departure was Joseph Dieterle, the Cleveland-area manager, who left for UBS Securities at the beginning of October, according to the NASD database.
The situation is casting some doubt on the future of private client head Michael Rice, one of the few major players in the post-merger management to come from Prudential. The breadth of the firings, to some, indicates that this issue isn't confined to a few branches. Sources close to the firm say Rice is an important part of its structure, though that's no guarantee of survival.
“He's Teflon,” says one. “He'll dodge and zig and zag unless something really sticks to him.”
“It would not be smart if they forced him to bail… It's not smart for the acquisition,” says another observer, who asked to remain anonymous. “They didn't do their due diligence if they didn't know about these issues.”