SEC is investigating Prudential on old pay-to-play allegations.

The Securities and Exchange Commission has launched a wide-ranging probe into the allegations that Prudential Securities Inc. routinely pressured its public finance employees to make political contributions as a wy of helping the firm win municipal bond business.

People familiar with the probe said the SEC's enforcement division has interviewed at lest five former employees of the firm regarding charges made in a 1990 lawsuit filed by Mark D. Schwartz, a former first vice president and treasure of the firm's tax-exempt division's political action committee. The sources said the SEC has asked questions relating to Schwartz's lawsuit, but not about Schwartz himself.

In the lawsuit, Schwartz said his superiors at Prudential threatened the bonuses and the jobs of employees who refused to earmark part of their salaries for political contributions. The lawsuit says the contributions were designed to influence underwriting selections on Prudential's behalf.

Schwartz, who was dismissed in 1989, charged that he was fired by the firm for complaining about the firm's alleged activities.

Schwartz sought damages totaling more than $500,000 in the case, which was later rejected by an arbitration panel for the National Association of Securities Dealers.

Despite the NASD's ruling, agents working for the SEC's enforcement division are asking former Prudential employees if the firm engaged in activities Schwartz said were pervasive. A spokeswoman for the SEC yesterday declined to comment.

People with knowledge of the investigation said an SEC attorney has interviewed former Prudential employees about the firm's previous activities in Chicago, Denver, Tennessee, and Texas, as well as the firm's overall fund-raising strategy.

According to testimony from the NASD arbitration, the firm targeted elected officials with campaign contributions and used politically connected insiders to win bond contracts.

Texas Payments

In one case, according to the testimony, the firm made three $50,000 monthly payments to a former Texas governor and his associates.

During the NASD arbitration, one former Prudential employee gave testimony backing up Schwrtz's allegations.

"Not making political contributions at Prudential was akin to [not] paying your federal income taxes. They were both entirely voluntary, but there were penalties for not doing so," said Harriet Stanley, one of five former Prudential bankers whose testimony supported Schwartz.

Sources said that SEC investigators have asked former employees -- and several who testified on behalf of Schwartz during the hearing -- to recall firm practices that occurred between 1988 and 1990.

During those years, Schwartz charged, John C. Glidden, Jr., Prudential's former investment banking chief, established a system that forced public finance employees to earmark as much as 2.5% of their salaries for political contributions to Prudential's political action committee.

SEC investigators, for example, have asked about Prudential's fund-raising activities for Chicago Mayor Richard Daley and fund-raising for candidates in Nashville, sources say.

Sources also said that the SEC has questioned potential witnesses about the firm's management structure, asking if supervisors of Gerald P. McBride, Prudential's executive vice president and manager of Prudential's tax-exempt division, helped public finance managers develop a policy designed to use campaign contributions to win municipal bond business.

People with knowledge of the investigation said that SEC investigators have asked if Glidden or McBride, coerced firm employees to make political contributions as a way of obtaining municipal bond business.

~No Coercion'

Glidden, who left the firm in 1992 and is head of public finance at the New Jersey-based E.A. Moos & Co., said in a telephone interview yesterday that no one at the firm was coerced to make political contributions.

Glidden said the firm maintained long-established policy of suggesting that employees set aside 1.5% of their pay for the firm's political action committee. Glidden said in an interview that he inherited the firm's contribution policy when he came on board in 1989. He said Schwartz developed the policy as part of his job as treasurer of the firm's political action committee.

"It was customary to give employees an indication what was an" appropriate contribution. "The way it was done was all perfectly legal and the law department signed off on it."

In an interview yesterday, Schwartz said: "I disagree with Mr. Glidden's characterization of what had occurred. I fully stand behind each and every allegation that was made in my lawsuit."

Schwartz refused, however, to comment about the SEC's inquiry. "It would be inappropriate for me to acknowledge or deny the existence of an investigation such as this."

Glidden, for his part, said he has yet to hear from the commission, but knows about the inquiry via someone with knowledge of the investigation. Still, he doubts that the SEC's inquiry will lead to anything further.

"The whole Schwartz case was decided in Prudential's favor, and in my favor, and against Mark Schwartz," Glidden said. "I don't expect anybody to call me."

Schwartz's case, however, dealt with his employment claims, not the validity of his charges. Schwartz also said "there are some in Congress who have expressed extreme distress? about the NASD's arbitration process. "The process should be eliminated altogether," he said.

Securities professionals are barred from bringing lawsuits against their employers, and instead are forced to bring disputes before an NASD arbitration panel, a securities lawyer said.

McBride, who remains as manager of Prudential tax-exempt division, but no longer oversees its investment banking arm, did not return a telephone call for comment.

Company spokesman William Ahearn said he has not "heard anything at all about" the investigation. "If I did, we wouldn't comment about it."

The probe comes as the SEC has made examining pay-to-play relationships in the municipal bond market a priority. The SEC is currently investigating charges that investment banks have relied on political contributions and politically connected individuals to win municipal bond business.

What makes this investigation different, some observers said, is that it involves charges made about five years ago. A number of the SEC investigations underway today concern deals and relationships started in the 1990s.

Others said the case may provide market executives with an indication of just how far back in time the commission may go in pursuing enforcement action.

Louis Loss, who specializes in securities law as professor emeritus at Harvard Law School, said the SEC believes it has the legal authority to bring cases that occurred many years ago.

"Generally, it's the commission's view that there is no statute of limitations on these cases," Loss said. "Some people think there is, but the SEC says there's no statute of limitation unless its spelled out in federal statute."

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