Trying To Heal Pru's Black EyeLeah Nathans Spiro
When Hardwick Simmons signed on as chief executive of Prudential Securities Inc. in May, 1991, he ran into lots more trouble than he bargained for. Simmons initially believed that the firm's liabilities for the limited partnerships it sold in the 1980s would be less than $50 million. But to double-check, he asked a trusted lieutenant to look at the numbers. To his amazement, the estimate came in at several hundred million dollars.
Today, Simmons has gotten used to the size of the hit. And he is extremely upbeat about the Oct. 21 settlement. With the matter in the news for the past two-and-a-half years, Simmons believes that the worst is over and that customers have accepted the idea that the firm has been cleaned up: "It's one last punch. The eye already got blackened."
Simmons' first priority was making sure that the states allowed Pru Securities to stay in business. "This removes the threat to our licenses. That's terribly important," he says.
ABOVE AVERAGE. Simmons points to the firm's strong earnings, which were $61 million in the third quarter before taxes and reserves. Assets under management increased from $14 billion on Sept. 30, 1992, to $21 billion a year later. Mutual-fund sales were 12% above the industry average, says Simmons. And lenders and institutional investors have stayed loyal. "The business isn't showing any signs of weakening," he says.
Analysts think that having to make such a huge reimbursement to investors for their losses will hurt the firm's image. "Your reputation takes a bit of a hit," says Chester Murray, associate director at Moody's Investors Services. "But from a financial perspective, they can certainly deal with this."
LITTLE CHOICE. The brokerage's saving grace is that it is owned by Prudential Insurance Co. of America, which has some $11 billion in capital and took in $35 billion in revenues in 1992. When Drexel Burnham Lambert Inc. pleaded guilty to fraud charges in 1989, it soon slipped into bankruptcy after its bank financing dried up. Prudential Insur-ance felt it had little choice but to stand behind its subsidiary. "If the Pru were ever to step back from a claim it owed," Simmons says, that could undermine its entire business.
But Simmons concedes that the firm hasn't exactly emerged unscathed. He estimates that Pru Securities has to set aside $1 dollar in reserves for every dollar it makes to pay for its limited-partnership liabilities. And he concedes that "it's harder for financial advisers to get new accounts," since they have to battle the firm's sullied image. "It feeds the frenzy of competitors who will Xerox articles and send them to our customers," he says. In July, brokers were opening 30,000 new accounts a month. That number dropped to 21,000 in September.
Another problem is that current Pru Securities customers who still own limited partnerships and want their share of the settlement money will have to file a complaint against their longtime brokers. Because of turnover among brokers and customer flight, only 12% of the firm's clients still own limited partnerships. But "it creates an awkward moment," says Simmons. For Simmons, it has been two-and-a-half years of awkward moments--and counting.