June 6 (Bloomberg) -- Prudential Financial Inc., the second- largest U.S. life insurer, will shut its 420-person stock research and trading unit, one of the last traces of the company's failed attempt to become a financial supermarket.

The institutional business, retained when Prudential sold its retail brokerage to Wachovia Corp. in 2003, will wind down this month, triggering about $72 million in after-tax closing costs, the company said in a regulatory filing today. The unit includes 30 senior analysts, 80 traders and 310 related staff in 13 cities including New York, London and Tokyo.

Prudential, which entered the securities business by purchasing Bache Halsey Stuart Shields in 1981, didn't have the scale to succeed as a one-stop shop for financial services, Chief Executive Officer Arthur Ryan said at a June 4 conference. A.G. Edwards Inc. agreed last month to be bought by Wachovia, the No. 4 U.S. bank, as regional brokers struggle to remain independent.

Prudential Equity Group was ``largely futureless,'' said George L. Ball, who was chairman of Prudential Bache Securities from 1982 to 1991 and now runs Sanders Morris Harris Group Inc., a Houston-based asset manager. It ``was forced to survive only from its institutional equity commission flow without any of the side benefits from a retail sales force utilizing its skills or a major investment bank that could benefit from its knowledge.''

The equity group broke even in 2005 and would have earned nothing in 2006 had it not been for a $34 million investment gain, said Prudential spokeswoman Theresa Miller. It made a market in approximately 1,400 Nasdaq securities last year, generating $260 million, or less than 1 percent, of the company's $32.5 billion in revenue.

Keeping Commodities

Coverage of the 350 companies Prudential rated will be dropped immediately, and the unit's offices in New York, Washington, San Francisco, Kansas City, Chicago, Philadelphia, Cleveland, Atlanta, Boston, London, Zurich, Paris and Tokyo will ultimately be closed, Miller said. The closing costs, $110 million before taxes, include $75 million in severance payments.

Bache Commodities Ltd., a commodities trading unit in New York, will be the sole piece of Prudential Securities -- the successor to Prudential Bache -- to remain at the insurer. Ed Keon, Prudential's chief investment strategist, and some members of his team will move to the company's asset management unit, Miller said.

Shares of Prudential fell $1.11, or 1.1 percent, to $99.46 in New York Stock Exchange composite trading. They've gained 16 percent this year, compared with a 1.2 percent increase for the Standard and Poor's 500 Financials Index.

A.G. Edwards

Ryan joined Prudential in 1994, when the insurer was also the fifth-largest securities brokerage, arranged initial public offerings, advised on mergers and sold products such as mortgages and auto insurance.

He's since closed or sold those businesses to focus on selling more life insurance and retirement savings products to aging baby boomers. Prudential is the No. 2 life insurer after New York-based MetLife Inc., according to 2005 premium ranking by A.M. Best Co.

Wachovia's purchase of most of Prudential Securities was a cashless transaction in July 2003. Charlotte, North Carolina-based Wachovia combined the firm with its own retail brokerage, giving Prudential a 38 percent stake in Wachovia Securities LLC.

U.S. Securities and Exchange Commission rules applying to Wachovia's $6.8 billion purchase of St. Louis-based A.G. Edwards give Prudential until later this month to decide whether it will sell its stake in Wachovia Securities to the bank, invest more in the joint venture, or stand pat, Miller said. Certain circumstances could push back the deadline to July or later, she said.

Regulatory Probes

Prudential's attempts in brokerage were diverted by regulatory probes. It paid more than $2 billion in the mid-1990s to settle U.S. allegations and investor lawsuits claiming it used fraudulent practices to sell limited partnerships starting in the 1980s. In August, Prudential agreed to pay $600 million to avoid prosecution by the U.S. Justice Department for improper mutual-fund trading through mid-2003.

``Any kind of a brokerage business carries a certain amount of compliance and litigation risk, so if you're not making money you have to think hard about staying in the business,'' said Jeff Schuman, an analyst at Keefe, Bruyette & Woods in Hartford, Connecticut, who rates the stock ``outperform.''

Equity-trading revenue at the biggest regional brokerages fell during the first quarter even as larger competitors such as Goldman Sachs Group Inc. earned more money than ever from buying and selling stocks. The bigger rivals have the size they need to offer cheaper prices, attracting more business.

Prudential Equity Group traded stocks for institutional money managers such as mutual funds and distributed research reports on corporate performance and the political and economic issues affecting the stock market. Last year it had assets of $137 million, the company said in a regulatory filing.

Michael Mayo

Prudential's failure to make independent research work without investment banking ``suggests to us that precious few will be able to ply these waters,'' said Eric Berg, an analyst at New York-based Lehman Brothers Holdings Inc., in a research note. He has an ``underweight'' rating on Prudential's stock.

In March, Prudential Equity Group lost Michael Mayo, the financial-services analyst known for his coverage of Citigroup Inc. and JPMorgan Chase & Co. Mayo, who joined Prudential in 2001, took his five-person team to Deutsche Bank AG.

To contact the reporter on this story: Josh P. Hamilton in New York at jphamilton@bloomberg.net.

Last Updated: June 6, 2007 18:35 EDT