Wall Street pain deepens

The clean-up of Wall Street gathered pace yesterday as investigations into the mutual funds industry led to the suspension of a dozen staff at Prudential Securities and JP Morgan agreed a $25m (£15m) settlement of separate allegations.

Prudential Securities, not related to the British firm Prudential, asked the brokers to resign from offices in Boston and New York amid an ongoing internal inquiry.

The move is an illustration of how widespread alleged improper trading has become in the $7 trillion mutual funds business. This latest investigation has shaken investor confidence perhaps even more deeply than previous scandals.

Mutual funds - similar to unit trusts - are commonly viewed as the low risk option for millions of Americans saving for retirement.

New York state attorney general Eliot Spitzer began an investigation into the mutual funds industry about eight months ago but the inquiry has snowballed since he reached a $40m settlement with the hedge fund Canary Capital Partners last month.

That settlement alleged that Canary had special trading arrangements with mutual funds run by four of the biggest names on Wall Street: Bank of America, Bank One, Janus Capital Group and Strong Capital Management.

The settlement sent shockwaves through the industry. Bank of America has already sacked six employees and on Monday two were suspended from Alliance Capital Management, the first outside the four mutual fund companies named in the Canary settlement.

The investigations are focusing on "late trading" and "market timing", methods of bending the rules to stack the odds in favour of the client or to make a quick profit on mutual funds. The Prudential departures are understood to relate to market timing, regarded as improper but, unlike late trading, not illegal.

Prudential Securities is now controlled by Wachovia Corporation after the two merged their retail brokerage operations in July. A Wachovia spokesman confirmed that there had been "some departures" but declined to comment on numbers. He said it was a "top priority to ensure trust and confidence in our financial advisers".

The securities and exchange commission said it had reached a $25m settlement with JP Morgan over allegations that the investment bank rigged initial public offerings during the internet boom.

The SEC claimed that JP Morgan induced customers who received allocations to place orders for further shares during the first few days of trading, to keep the price rising.